Treasury proposes housing, SHIF deductions from gross salaries to boost take-home pay

The National Treasury has proposed that the Housing Levy and Social Health Insurance Fund (SHIF) deductions be made from workers' gross salaries before taxation, aiming to increase take-home pay for thousands of employees.

The change, included in amendments to tax laws, would replace the current system, which gives a tax relief of 15 per cent on these contributions.

The proposed amendment would end the 15 per cent tax relief applied to the housing levy since March and to the now-defunct National Health Insurance Fund (NHIF) since 2021. Instead, by deducting these levies from gross pay before income tax, employees would see an overall reduction in their tax burden.

Treasury calculations suggest the shift could mean lower monthly taxes for workers, with those earning Sh50,000 saving about Sh318, while employees with monthly salaries of Sh100,000 and Sh500,000 could save Sh637 and Sh3,187, respectively.

The proposal seeks to address concerns that heavy payroll deductions have left some workers with less than a third of their pay after taxes, potentially offering greater relief.

"The Bill proposes to amend the Income Tax Act to provide that the following amounts shall be allowable deductions in the computation of taxable income of individuals: contributions to the Social Health Insurance Fund (SHIF), the amount deducted in accordance with affordable housing, and contributions to a post-retirement medical fund up to Sh15,000," the Treasury said in a preview of the proposed Tax Laws (Amendment) Bill, 2024, which is expected to be tabled in Parliament soon.

"These amendments will boost disposable income and enhance employees' take-home pay."

Payslips concerns

Despite the proposed relief, concerns remain over how recent payroll deductions, including new and increased contributions, continue to impact workers’ earnings.

Last month, employees began paying into SHIF, which replaced NHIF. The revised SHIF rates require employees earning between Sh100,000 and Sh1 million to contribute between Sh1,050 and Sh25,800, making it the largest payroll deduction after income tax.

Additionally, contributions to the National Social Security Fund (NSSF) rose from Sh200 to a maximum of Sh2,160, and a 1.5 per cent housing levy on gross pay, introduced in July last year, has further cut into workers' earnings.

Employers worry that these deductions could leave some workers with less than one-third of their gross pay after meeting other financial obligations, potentially breaching the Employment Act, which restricts deductions to no more than two-thirds of an employee’s salary.

The Federation of Kenya Employers (FKE) noted that the government has not provided guidance on how to handle these deductions while remaining compliant with the law.

As a result, some employers have been restructuring loans to ease the financial pressure on employees, while workers have been reducing voluntary savings in saccos and banks to manage monthly expenses.

Since switching to the SHIF, employees face new monthly deductions, with those earning Sh100,000 paying Sh1,050, while those on Sh200,000 face deductions of Sh3,800. Workers earning Sh450,000, Sh800,000, and Sh1 million face additional costs of Sh10,675, Sh20,300, and Sh25,800, respectively.

The figures push the total mandatory contributions to at least 21.5 per cent of a Sh50,000 salary, 30 per cent for those earning Sh150,000, and above one-third for those making over Sh550,000.

Even before the new SHIF rates, employers observed that monthly deductions were consuming more than two-thirds of workers' pay, particularly as living costs and loan interest rates reached levels unseen in nearly two decades.

In February, salaried workers began seeing doubled NSSF contributions, now set at Sh2,160, and the 1.5 per cent housing levy continues to cut between Sh750 and Sh15,000 monthly from earnings between Sh50,000 and Sh1 million.

According to the Kenya National Bureau of Statistics (KNBS), 1.28 million Kenyans, or 42 per cent of those in formal employment, earned below Sh50,000 by 2021, while 1.735 million, or 58 per cent, earned Sh50,000 and above. Notably, those earning Sh100,000 or more totaled 371,894 Kenyans.

The recent SHIF contributions have significantly impacted employees with salaries ranging from Sh100,000 to Sh1 million, who now contribute an additional Sh1,050 to Sh25,800 towards the state-backed insurance.

This amount now represents the largest deduction after PAYE for affected employees.