The Finance Act 2023 introduced several key adjustments that affect employers, business owners, HR professionals, and employees across Kenya. These updates influence payroll operations, tax planning, and employee benefits. Below is a concise and simplified breakdown of the most important changes.
Affordable Housing Levy
The Act introduced a mandatory Affordable Housing Levy of 1.5 percent of an employee’s gross salary, matched by a 1.5 percent employer contribution. Employers must remit the levy by the ninth working day of the following month, and any delay attracts a monthly penalty. The employer’s contribution is tax-deductible. This requires immediate payroll system updates and clear communication to employees regarding reduced net pay.
Updated PAYE Tax Bands
Two new tax brackets were added for high-income earners. Monthly income between KES 500,000 and 800,000 is taxed at 32.5 percent, while income above KES 800,000 is taxed at 35 percent. HR teams must ensure these bands are applied accurately to maintain compliance.
Mileage and Travel Allowances
Mileage reimbursements paid according to Automobile Association of Kenya rates are now tax-exempt. Any amount above the approved rate is treated as a taxable benefit. Employers should align travel policies with AA standards to avoid unnecessary tax exposure.
Taxable Membership and Club Fees
Employer-paid club memberships, such as gyms or social clubs, are now considered taxable benefits for employees. Employers may still claim these expenses, but HR must report them correctly within payroll.
ESOP Taxation Adjustments
Tax for Employee Share Ownership Plans is now based on the market value at the time an employee exercises the option. The Act also allows certain tax deferral options, offering flexibility for companies using equity-based compensation.
Turnover Tax Changes
Businesses with annual turnover between KES 1 million and KES 25 million now fall under Turnover Tax, charged at 3 percent. SMEs must review their tax status and adjust financial planning accordingly.
Digital Asset Tax
A 3 percent withholding tax now applies to income from the transfer or exchange of digital assets. This must be remitted within five working days, requiring accurate record-keeping for businesses operating in digital platforms.
Withholding Tax Remittance
Withholding taxes must now be remitted within five working days of deduction, shortening the compliance timeline and requiring tighter internal controls.
For assistance with compliance, payroll setup, or HR systems, contact +254 702 339 699 or email sales@faidihr.com.