How will December's Payroll be processed

The recent enactment of the Tax Laws (Amendment) Act has brought significant changes to how contributions to the Affordable Housing Levy and post-retirement medical funds are treated. Moving forward, these contributions will now be deductible from payable tax liabilities, a move aimed at mitigating double taxation. This change is seen as a welcome relief for many Kenyans who have long expressed concerns about the high taxation burden.

However, the relief may not be immediate. The effective date for all provisions of the Tax Law is set for December 27, 2024, raising questions about how December's payroll will be processed. 

The primary point of confusion is whether the new provisions should be applied to the entire month of December 2024 or only from December 27 onward when calculating Pay As You Earn (PAYE) taxes. A common interpretation of the law suggests that it should be applied proportionately from December 27. However, since PAYE is calculated on a monthly basis, there is uncertainty about whether the changes should apply to the entire month or just the last four days. This has left many employers and finance professionals unsure of how to handle December’s payroll. A finance expert explained that there are essentially two possible approaches employers may take:

1. Early Payroll Processing (Before December 27, 2024), where employees would receive their salaries earlier, but their pay would be smaller since the new tax provisions would not yet be in effect. This option is often preferred during the festive season as it allows employees to have funds in hand for holiday expenses.

2. Late Payroll Processing (After December 27, 2024), where employees would receive their salaries later, but the amount would be larger since the new tax rules would reduce the amount of tax payable. While employees may receive more money, they risk entering the holiday season without their December pay.

“The twist lies in how finance professionals decide to process the payroll,” the expert noted. “Depending on the approach taken, employees will either go home with less money, but sooner, or more money, but later.” The confusion surrounding December’s payroll is unique to that month due to the early disbursement of salaries during the festive season. From January 2025 onward, the changes will be fully operational, and Kenyans can expect higher take-home pay. This is because contributions to the Affordable Housing Levy will be deducted from payable tax liabilities, thereby reducing the overall tax burden. The effective date for the Tax Laws (Amendment) Act is December 27, 2024, and employers must decide whether to process payroll before or after this date, affecting both the timing and amount of employees’ salaries. From January 2025 onward, employees will enjoy higher take-home pay due to the deductibility of the Affordable Housing Levy from tax liabilities.

While the new law provides long-term relief, the short-term confusion over December’s payroll requires clear communication from employers. Employees are encouraged to stay informed and consult with their HR or finance departments to understand how their December salary will be affected.

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