The Finance Act 2024 Kenya, enacted in December 2024, introduced significant changes to the country's tax framework, especially for employers and employees. A major shift in this Act is the classification of the Affordable Housing Levy (AHL) and the newly implemented Social Health Insurance Fund (SHIF) as allowable deductions under the Income Tax Act.
This amendment affects how employers calculate Pay As You Earn (PAYE) and how employees file their tax returns through the KRA P9 form, which has been updated accordingly.
What Are Allowable Deductions?
Allowable deductions are amounts subtracted from an employee's gross salary before PAYE is computed. These deductions reduce the taxable income, meaning an employee pays less income tax.
Newly Recognized Allowable Deductions:
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Affordable Housing Levy (AHL): Now deductible before PAYE is applied.
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Social Health Insurance Fund (SHIF): Replaces NHIF and is deductible under the same principle.
These updates bring clarity and fairness to the tax system, aligning payroll obligations with the government's housing and healthcare funding initiatives.
KRA P9 Form Update
In response to the changes introduced by the Finance Act 2024, the Kenya Revenue Authority (KRA) revised the format of the P9 form, which employees use to file their annual returns.
Key Updates to the P9 Form:
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SHIF and AHL now appear under Section D: Allowable Deductions.
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This adjustment ensures the correct calculation of taxable income.
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Employers are required to generate P9 forms in this new format starting from January 2025, covering the 2024 income year.
Implications for Employers and Employees
Employers
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Must update payroll systems to reflect SHIF and AHL as pre-tax deductions.
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Should ensure PAYE is calculated based on net income after these deductions.
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Are responsible for providing the correct P9 form format for employee use.
Employees
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Will see lower PAYE due to the expanded allowable deductions.
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Should verify that their payslips and P9s reflect the correct figures.
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Must use the new P9 form when filing KRA tax returns for 2024.
Sample PAYE Calculation Under Finance Act 2024
Example:
| Item | Amount (KES) |
|---|---|
| Gross Salary | 100,000 |
| NSSF Tier I & II | 2,160 |
| SHIF Contribution | 2,500 |
| Affordable Housing Levy | 1,500 |
| Total Allowable Deductions | 6,160 |
| Taxable Income | 93,840 |
PAYE is calculated based on KSh 93,840, not the full KSh 100,000. This reduces the overall income tax burden on employees.
Compliance Steps for HR and Payroll Teams
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Review and upgrade payroll systems to integrate the new deductions.
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Use the updated P9 form for end-of-year reporting.
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Educate staff on how these changes affect their pay and taxes.
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Verify that monthly payroll and annual returns align with the Finance Act 2024.
Need Help Adapting to the Finance Act 2024?
If you need assistance updating your payroll processes to comply with the latest regulations, our team is here to help.
Call: +254 702 339 699
Email: sales@faidihr.com
At FaidiHR, we provide compliant, automated HR and payroll solutions tailored for the Kenyan market. Let us help you stay compliant, accurate, and efficient.
Conclusion
The Finance Act 2024 Kenya is a pivotal update to how payroll taxes are computed. By recognizing the Affordable Housing Levy and SHIF as allowable deductions, the Act brings positive change to employee take-home pay and streamlines employer compliance. Ensuring accurate implementation of these changes will be essential for all businesses and professionals involved in payroll, taxation, and HR in Kenya.