Taxation of Cash Allowances in Kenya Explained
In Kenya, employees often receive cash allowances alongside their basic salary. These cash-based incentives form part of an individual’s employment income and are subject to taxation under the Income Tax Act (Cap 470). Many employees are surprised when tax is deducted from such allowances—yet this is in line with the law.
What Are Cash Allowances?
Cash allowances are monetary perks given in addition to salary. Examples include:
- Leave pay and sick pay
- Wages and salaries
- Commissions and bonuses
- Travel, entertainment, and subsistence allowances
- Payment in lieu of leave or service
- Gratuity and fees for services rendered
According to Section 3(2)(a)(ii) and Section 5(2)(a) of the Income Tax Act, all these are taxable as part of gross employment income.
Taxable and Non-Taxable Benefits
Employers may offer additional non-cash benefits, which are also subject to taxation depending on their nature and value. These include:
- Housing benefit: Taxed at 15% of monthly salary excluding the housing benefit. If the house is rented from a third party or is employer-owned, the higher of actual rent or market value is taxable.
- Motor vehicle benefit: Taxed based on the engine capacity and business usage.
- School fees paid by employer: Typically taxable on the employer, not the employee.
- Facilities or benefits under KShs. 3,000 monthly: Exempt, but fully taxable if exceeded.
Allowances That May Be Exempt
Some cash allowances are partially exempt under specific conditions:
- Per diem (travel allowance): The first KShs. 2,000 per day when on official duty away from the regular workplace is not taxable.
- Gratuity into retirement schemes: Exempt up to KShs. 240,000 per year when paid into a scheme registered with the Commissioner.
Finance Act 2020: Change in Exemptions
Before 2020, bonuses, overtime, and retirement benefits were exempt from tax for employees earning below the lowest tax band. However, the Finance Act 2020 repealed this provision. As a result, all cash allowances are now taxable, regardless of income level, as long as total income falls within a taxable bracket.
Why It Matters
Understanding the taxation of cash allowances in Kenya ensures that employees are well-informed and not caught off guard by lower-than-expected take-home pay. Employers, on the other hand, must ensure they deduct and remit the correct taxes to avoid penalties.
Conclusion
Both employees and employers must stay compliant by understanding how cash and non-cash allowances are taxed. Being informed reduces confusion, helps with financial planning, and aligns with Kenya Revenue Authority’s tax compliance expectations.
