Understanding Your Paycheck: Demystifying deductions, taxes and understanding net pay.

It’s the end of the month, and once again, your paycheck has arrived with a few figures headed off in directions that aren’t your bank account. You wonder when they did a percentage of the work to garner a percentage of your hard-earned money.

As the country’s financial laws continue to change, employers grapple with how to remain compliant with all the rules and regulations directed their way by the government. Sometimes, it seems like the moment you adjust to the new changes. A new bill is in Parliament, just waiting to thwart your progress. Particularly with the Finance Act of 2023, employers are still reeling from these changes as they try to keep up and remain compliant.

In this article, we will take a closer look at where your money is going, why it is heading there, to begin with, and the rights and protections afforded to you so the numbers on your paycheck finally start to add up. While this focuses on Kenyan tax laws, we will also share resources regarding taxation across Africa for our diverse clientele.

Deductions, Taxes and Net Pay… What Are They?

 Deductions are part of your wages retained by your employer to pay taxes or facilitate benefits such as medical insurance. Some of these deductions are government-mandated and not just influenced by the company culture, making employers legally bound to make them, while others are unique to each employer’s contract with their employee. One common deduction you may come across in Kenya is the National Social Security Fund (NSSF), where a portion of your income is remitted to the Fund when the employee is retired from regular paid employment. 

The Kenya Revenue Authority (KRA) defines Income Tax as a direct tax imposed on income from a business or employment, as is in this case. One way the Authority remits this tax from employees is through PAYE, deducted from the employee’s paycheck by their employer at rates already predetermined by the government. 

Net pay is easy enough to deduce after all the above. It is the sum you take home at the end of every month after various deductions and taxes are remitted to their respective bodies. So, what kind of deductions and taxes are you required to pay? 

Salary Deductions and Taxes In Kenya

The deductions and taxes you pay, are meant to benefit you in one way or the other after all, they come from your hard-earned money. Governments impose taxes with the promise that those funds will be used in service of the people who pay them. Most of the deductions you make are also government-mandated and therefore, ought to fulfil a similar purpose. Here are a few of the most common ones:

• PAYE

As mentioned before, PAYE-Pay As You Earn is a form of income tax paid to the government by your employer and is one of Kenya’s most prominent forms of taxation. PAYE is progressive which means its rates are directly proportional to your earnings. The rates are predetermined values made by the government ranging from 10% to 35% as detailed in the Finance Act of 2023. Earnings below Kshs 24,000 are not subject to PAYE. 

PAYE is a fairly common form of taxation across the world due to its convenience for all parties involved and ease of enforcement to taxation bodies. You can take advantage of Workpay’s PAYE Calculator to tally your contributions. 

• National Social Security Fund (NSSF)

Established in 1965, NSSF was created to provide financial security for Kenyans upon retirement. Over the years it has undergone numerous changes but its core mandate remains the same, to provide a safety net for Kenyan workers at the end of their careers. Per a notice from the Fund, effective February 1 2024, employers will now deduct a maximum of Kshs 2,160 from their employees, which they match and remit to the Fund. 

• National Health Insurance Fund (NHIF)

The NHIF, established in 1966 under the Ministry of Health aims to make healthcare accessible to all Kenyans. Through employee contributions, the Fund facilitates affordable medical insurance coverage, enabling Kenyans to access essential healthcare services without financial strain. Employers are not required to match the value of employee contributions. Still, contributions are graduated with the highest contribution currently valued at Kshs 1,700 for employees earning upwards of Kshs 100,000 per month.

• Affordable Housing Levy (AHL)

Though fairly new, the Levy is an addition to the existing National Housing Development Fund that was established to provide Kenyans with affordable housing. The Housing Levy takes this a step further by remitting 3.0% of the employee’s gross monthly income to the Fund for it to enact its vision. The Housing Levy has had some hiccups with its implementation but will be signed into law by the president on March 18 2024. 

• Pension Schemes

The Employment Act requires all employees to be included in a pension plan by their employer. Therefore, subsequent deductions can be made to their salaries concerning this. These schemes are regulated by the Retirement Benefits Authority and contributions made by an employee are typically matched by their employer. Depending on the nature of the pension scheme, employees can have either a defined contribution plan or a defined benefits plan. With a defined benefits plan, employees take home either a lumpsum of their contributions or agree to a definite monthly payment. Defined contribution plans conversely create an investment account for the employee in which the balance is available for their use upon retirement. 

In Conclusion

The above is a summary of some of the deductions you might find on your paycheck. If some of those values don’t add up, talk to your employer and find out where the money is going. When dealing with your taxes and deductions, knowledge is power. Governments across the continent and bodies such as the Kenya Revenue Authority and the Tanzania Revenue Authority have provided information on their websites to help you understand where your money is going and how to remain tax-compliant. Employers must also remain abreast of all the ongoing changes in a country’s fiscal policies to keep themselves compliant. These efforts are crucial to fostering a culture of fiscal responsibility that contributes to the well-being of all members of society. This, in turn, enables sustainable growth of the economy and prosperity of all citizens.

With Workpay’s commitment to serving Africa as a whole, we have curated resources and continue to stock up our repertoire with insights for our diverse clientele. Whether you’re Ghanaian or Tanzanian, you can find further insights into the more intricate details of African taxation laws on Workpay’s blog.