Employment Income and Benefits-in-Kind
Income Tax
Employment Income and Benefits-in-Kind
Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation
1. What constitutes employment income
Under Kenya's Income Tax Act (ITA), employment income includes: salary, wages, overtime, bonuses, commissions, and allowances. It also includes benefits-in-kind (BIK) — non-cash benefits provided to an employee by their employer that have a monetary value. All BIKs are added to cash remuneration to compute total taxable employment income.
2. Common benefits-in-kind and their valuation
Company car benefit: valued at 2% per month of the original cost to the employer (i.e. 24% per year). If the car is also used for private purposes, the full 2%/month applies. Example: car cost KES 2,400,000 → annual car benefit = KES 576,000.
Housing benefit: valued at the higher of 15% of total employment income (excluding the housing benefit itself) or the actual rent paid by the employer. A servant quarter, furniture, and security provided with the house are included.
Loans at below-market interest: the benefit is the difference between interest charged and market interest rate on the loan balance. The KRA publishes the prescribed rate (typically the Central Bank rate + 2%).
Medical expenses: employer contributions to a registered medical scheme are exempt up to KES 1,000 per month (KES 12,000 per year). Contributions above this limit are taxable benefits.
3. Personal relief and other reliefs
Every resident individual is entitled to personal relief of KES 28,800 per year (KES 2,400 per month). This is deducted directly from the income tax liability (not from income).
Insurance relief: 15% of qualifying insurance premiums paid, up to KES 60,000 per year.
Pension contributions relief: employer contributions to a registered pension scheme are exempt; employee contributions are deductible up to KES 30,000 per month.
4. PAYE — Pay As You Earn
PAYE is deducted monthly by the employer and remitted to the KRA by the 9th of the following month. The tax is computed on cumulative monthly income using the progressive tax bands:
Monthly income (KES) Rate
0 – 24,000 10%
24,001 – 32,333 25%
32,334 – 500,000 30%
500,001 – 800,000 32.5%
Above 800,000 35%
The annual bands are 12 times the monthly bands.
5. Computation format
Gross salary X
Add: car benefit (2%/month × cost × 12) X
Add: housing benefit (higher of 15% × income or actual rent) X
Add: other taxable benefits X
Total taxable employment income X
Less: allowable pension contributions (X)
Taxable income X
Tax on taxable income (using bands) X
Less: personal relief (28,800)
Less: insurance relief (X)
PAYE liability X
6. Lump sum payments
Gratuity and service pay paid on retirement or termination are taxable if not from a registered pension scheme. Compensation for loss of office — the first KES 1,200,000 is exempt; the excess is taxable employment income.