How to Reduce the Tax You Pay on Your Payslip by Up to Ksh360K (Legally)

One of the most effective strategies in wealth building is tax planning. This involves structuring your money in a way that minimise the amount you owe to the government. In Kenya, tax planning can allow you to legally avoid some taxes, increase your take home pay, or even plan 

One of the most powerful legal tools Kenyans have to increase their take-home pay is the tax-deductible pension contribution. The enactment of the Tax Amendment Laws of 2024 increased the amount Kenyans can legally shield from the taxman from Ksh240,000 to Ksh360,000 per year.

By contributing to a registered pension scheme, you are allowed to deduct up to Ksh360,000 per year (Ksh30,000 per month) or 30% of pensionable income, whichever is lower. 

The new ceiling allows Kenyans to reduce taxable income significantly, immediately lowering the Pay As You Earn (PAYE). The net effect is that a contribution to the retirement scheme allows you to redirect some of your income from KRA to your own retirement savings. 

Read more: How to Determine How Much You Need to Retire Comfortably   

How to get a Tax Relief Through Pension Savings

For contributions to qualify for tax relief, two conditions must be met:

1. The retirement scheme (Pension or Provident Fund) must be registered with the Retirement Benefits Authority (RBA).
2. The scheme must also be registered or apply for tax exemption with the KRA Commissioner of Domestic Taxes 

Read more: How to Pay Less Taxes Legally in Kenya

If the scheme is registered and compliant, the process is as follows:

• Employer's Role: Your employer is responsible for ensuring the tax deduction is applied correctly. They deduct your retirement contribution (up to the current maximum of Ksh 30,000 per month or 30% of pensionable income, whichever is lower) from your gross income before calculating your Pay As You Earn (PAYE) tax.
• Immediate Relief: This deduction lowers your taxable income, resulting in less PAYE being withheld from your monthly payslip. You receive the tax relief benefit instantly.
• Documentation: Your payslip and the annual P9 Form (issued by your employer) will reflect the deductible contribution amount, which is essential for the annual tax filing.

The provision also allows one to save more aggressively for retirement. When you eventually withdraw the funds upon retirement, your savings are not subjected to any tax. 

The retirement benefits are generally tax-free if you meet certain conditions:

• You have attained the scheme's defined retirement age.
• You have been a scheme member for at least 20 years.
• The withdrawal is due to ill health before reaching retirement age.

Lump-Sum Taxation: If the conditions are not met, or for amounts exceeding the tax-exempt thresholds, a Pension Withholding Tax is applied, though the first Ksh 600,000 (or Ksh 1,000,000 for individuals aged 65 and above) of the lump-sum payment is typically tax-exempt. 

The balance then attracts the graduated bands for PAYE. However, the amounts will have generated interest as the retirement schemes typically invest the savings and give an annual return, meaning it's not the same as having paid the PAYE. 

Here is an example: 

James earns Ksh150,000 Gross and does not contribute to a private pension scheme. Here is a breakdown of James’s deductions: 

PAYE (After reliefs) - Ksh 28,000

Mandatory Deductions (SHA, NSSF, Housing Levy) - Ksh16,870

Take Home Pay - Ksh105,130

On the other hand, Naliaka earns Ksh150,000 and contributes Ksh30,000 to  a private pension scheme. 

PAYE (After reliefs) - Ksh 26,470

Mandatory Deductions (SHA, NSSF, Housing Levy) - Ksh10,695
Pension Contribution - Ksh30,000

Take Home Pay - Ksh82,834

While Naliaka puts Ksh30,000 into her retirement fund, the difference in her take home from James is Ksh23,000 (Ksh105,130 - Ksh 82,834). Every month, Naliaka’s Ksh7,000 that would have gone to the KRA is redirected into her savings.

Now, pension funds have had an average return of 10% per annum over the last 10 years. Assuming Naliaka is 20 years from retirement, the extra Ksh7,000 she saves translates to Ksh5 million in retirement. 

Other ways to reduce the taxable income

1. Post-Retirement Medical Funds

The 2024 amendments also introduced tax-deductible contributions to Post-Retirement Medical Funds of up to Ksh15,000 per month and Ksh180,000 per year. 

Contributions to these funds qualify for tax relief, reducing PAYE while helping one have dedicated healthcare funding in retirement

2. Mortgage Tax Relief 

Mortgage interest, not exceeding Ksh 360,000 per year (Ksh30,000 per month), is also among the ways to reduce the taxes, given that they are tax-deductible.

However, this applies to money borrowed by a person from one of the banks to purchase or improve premises occupied by the person for residential purposes. Therefore, not applicable for rental units.

The financial institution where the mortgage is taken also has to be approved by the Kenya Revenue Authority (KRA).

3. Insurance Relief

Under the Kenyan tax laws, insurance relief is granted to an employee who has paid insurance premiums for life or health, or education policies for himself, his wife, or child. The relief is given at 15% of premiums paid up to a maximum of Ksh60,000 per annum.

This applies to an education policy that has a maturity period of at least 10 years.

Other tax deductibles on Kenyans' payslips include contributions made to the Social Health Insurance Fund (SHIF) and the Affordable Housing Levy.

Read more: How to Pay for the 1.5% Housing Levy if You Don't Earn a Salary

Wrapping up

Legal tax reduction, often referred to as tax avoidance, involves structuring your finances in a way that takes advantage of reliefs and deductions allowed by law. This is very different from tax evasion, which involves hiding income or falsifying records and attracts heavy penalties.

The government uses tax reliefs as incentives to encourage good financial behaviour, such as saving for retirement. The 2024 tax amendments build on this idea by making pensions a powerful tool for both long-term security and short-term tax savings.

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