How smart Kenyans save over Ksh 100,000 on their PAYE tax bill

Every employed or self-employed Kenyan knows the slice of their hard earned wages that the taxman takes out every end of the month as PAYE tax. With the highest tax rate at 30%, the tax man could be taking out a significant portion of your basic pay, however, there are several simple and legal ways that one can lower their PAYE tax bill while simultaneously putting away this tax on their future savings. While paying taxes is each and every citizen’s civic duty, it is nonetheless prudent for individuals to proactively manage their personal finances, tax planning being one part of it.

Using these two simple financial planning products, anyone could save over KSh 100,000 annually on their PAYE tax bill.

The first and easiest way to saving money on your monthly and annual PAYE tax bill is by taking out a life insurance/savings plan. Although many Kenyans shun insurance products because of the poor reputation of some industry players, many products exist that will offer solid protection and competitive returns on your savings. A life insurance plan is a financial product where the insured makes regular payments to the insurance provider to offer financial protection and compensation in the event of death, permanent or total disability or critical illness. It may either be for a set period of time e.g. 20 years or for the entire lifetime of the insured person(s). It is common to use this policy as a savings plan or an estate-planning tool. Similar to this, the education savings policy is structured to cover the cost of school fees for the child of the insured. It pays out set amounts on maturity to cover the child’s educations needs. Depending on the insurance provider and product, these products can offer a compromise between insurance protection or superior returns on savings. Many Kenyan parents take out education plans to save for and guarantee the future of their children; these are possibly the most popular life insurance products in the market.

From these life insurance plans, the monthly contribution is allowed a tax relief of up to KSh 5,000 per month totalling up to KSh 60,000 per annum. In addition, all future pay-outs on the policy and any bonuses that are accrued are not liable to any form of Capital Gains Tax (CGT) or any other taxation for that matter. A well structured life insurance / education savings plan can provide the ensured with better financial returns that traditional savings products like bank accounts. With the introduction of the interest rate cap in Kenya, many banks have reclassified savings accounts as current/transactional accounts thereby denying them any interest. Many salaried Kenyans have embraced life insurance and savings plans, deducting their monthly contributions from the salary.

Total PAYE tax savings: Up to KSh 60,000

The second best way to save on your monthly PAYE bill is through long-term savings in the form of pensions. Most Kenyans are familiar with the National Social Security Fund (NSSF), which is the government mandated savings scheme. This is mandatory for every employer in Kenya to remit up to 6% of the employee’s gross pay and the employer also matches this. This is then remitted to the NSSF, the government body responsible for pensions. Savings under this scheme are only accessible upon retirement, the retirement age in Kenya being 65 years.

No matter how young and vibrant we are today, there comes a time in our lives when we will have to retire. However, living expenses like food, medical care, housing and electricity do not retire. Saving in a retirement benefits scheme now helps us to save and create the income needed in retirement to cater for these expenses.

On the other hand, we have the private pension schemes that are little known in Kenya. These registered pension schemes allow an individual to save a voluntary amount every month, putting away money for old age or retirement when one is not able to earn anymore.

They present a great tax relief opportunity allowing an individual to save up to 30% or KSh 20,000 per month in private pensions attracting 0% PAYE taxes. With this generous allowance, one could be saving up to KSh 240,000 with no taxes whatsoever.

There are many registered retirement benefits schemes provided by many of the strong and renown insurance companies in Kenya ensuring that your life savings are in safe hands.

Private pensions offer very competitive returns on one’s savings owing to the stiff competition between providers in the industry. Many of the large providers offer minimum guaranteed returns of 4-7% per annum and consistently post double digit annual returns.

In addition, it is quick and easy for an individual contributor to move their private pension from one provider to another whether seeking better returns or simply moving from one employer to another.

For Kenyans living and working abroad with pensions in their country of residence, it is also possible to transfer those pensions tax free to Kenyan pension providers. Kenyans working in the United Kingdom can take advantage of this to return their life savings to Kenya tax-free using the Qualified Recognized Overseas Pension Scheme (QROPS).

Total PAYE tax savings: Up to Ksh 80,000

Using these two simple and common financial products, any proactive Kenyan could be saving on their PAYE tax burden. The government has purposely given tax relief on these products to encourage Kenyans make long term savings, ensuring financial security and self sustenance even in old age.