Tax planning is an essential financial strategy that ensures compliance with the law while optimizing the amount of tax payable. In Kenya, where the tax framework is regulated by the Kenya Revenue Authority (KRA), individuals and businesses can legally minimize their tax liability by leveraging available incentives, deductions, and reliefs. With the Tax Laws Amendment Act, 2024 coming into effect on 27th December 2024, this blog incorporates the latest changes to the PAYE system while accounting for updates in the Tax Act, 2023.
Understanding the Kenyan Tax Framework
The Kenyan tax system comprises several taxes, including:
Income Tax: Levied on individuals and businesses under the Income Tax Act (Cap 470).
Value Added Tax (VAT): A consumption tax on goods and services at a standard rate of 16%.
Customs and Excise Duty: Taxes on imported goods and specific products.
Turnover Tax (TOT): A tax for small businesses earning below KSh 50 million annually.
Corporate Tax: Charged at a standard rate of 30% for resident companies and 37.5% for non-residents.
Tax planning involves structuring transactions and financial affairs to take full advantage of allowable deductions, credits, and exemptions under these laws.
Effective Tax Planning Strategies in Kenya
1. Leverage Tax Reliefs and Deductions
The Tax Laws Amendment Act, 2024 introduces new provisions and removes some existing reliefs:
New Deductible Items:
Affordable Housing Levy: Amounts deducted pursuant to the Affordable Housing Act, 2024.
Post-Retirement Medical Contributions: Contributions up to KSh 15,000 per month.
Social Health Insurance Fund (SHIF): Contributions to SHIF are deductible.
Mortgage Interest: Deductible up to KSh 360,000 per year (KSh 30,000 per month) for loans borrowed to purchase or improve residential premises.
Registered Pension Contributions: Deductible up to KSh 360,000 per year (KSh 30,000 per month).
Removed Reliefs:
Affordable Housing Relief.
Post-Retirement Medical Fund Relief.
Example: John, an employee earning KSh 100,000 monthly, contributes KSh 10,000 to SHIF, KSh 20,000 to a registered pension scheme, and pays KSh 30,000 monthly mortgage interest. By claiming these deductions, John reduces his taxable income by KSh 60,000 monthly, significantly lowering his PAYE liability.
2. Utilize Allowable Expenses for Businesses
Businesses can deduct expenses wholly and exclusively incurred in generating taxable income. These include:
Salaries and wages.
Rent and utility bills.
Repairs and maintenance.
Advertising and marketing expenses.
Case Study: ABC Traders reported KSh 5 million in revenue. After deducting operational costs, including KSh 1 million for staff salaries and KSh 500,000 for advertising, their taxable income reduced to KSh 3.5 million. By strategically documenting all allowable expenses, ABC Traders minimized their tax liability.
3. Incorporate Tax Incentives
Kenya offers tax incentives to encourage investment and economic growth:
Capital Deductions: Investment in buildings, machinery, and other capital assets qualifies for wear and tear allowances.
Export Processing Zones (EPZs): Companies operating in EPZs enjoy a 10-year tax holiday on corporate income.
Special Economic Zones (SEZs): Reduced corporate tax rate of 10% for the first 10 years and 15% for the subsequent 10 years.
Case Study: XYZ Manufacturing invested in new machinery worth KSh 10 million. Under the investment deduction allowance, they claimed 100% of the cost in the first year, significantly reducing their taxable income.
4. Optimize Employment Benefits
Employers can provide non-cash benefits to employees, such as housing, medical cover, or company vehicles, which may attract lower taxation compared to cash compensation. The 2024 amendments clarify exemptions for certain benefits:
Benefits valued under KSh 60,000 annually (KSh 5,000 per month) are excluded from taxable income.
Meals provided by an employer valued up to KSh 60,000 annually are tax-exempt.
Example: Jane’s employer offers a housing allowance of KSh 20,000 monthly. By opting for employer-provided housing valued at KSh 15,000, Jane reduces her taxable income and overall tax liability.
5. Adopt Proper Business Structuring
The legal structure of a business influences its tax obligations. Entrepreneurs can choose among sole proprietorships, partnerships, or limited liability companies to optimize tax liability.
Example: A partnership between three consultants generates KSh 6 million annually. Each partner’s share is taxed individually, benefiting from lower individual tax brackets compared to the 30% corporate rate for companies.
6. Take Advantage of Turnover Tax
For small businesses earning below KSh 50 million, turnover tax at 1% of gross income is often more favorable than corporate tax.
Example: A bakery earning KSh 3 million annually opts for turnover tax. Instead of paying 30% corporate tax on profits, the bakery pays 1% of gross turnover, amounting to KSh 30,000 annually.
7. Plan for Withholding Tax
Withholding tax is deducted at source on specific income types, such as dividends, interest, and royalties. Understanding withholding tax obligations can prevent penalties and ensure cash flow planning.
Case Study: A local consultant receives KSh 1 million in fees from an international client. The client deducts 5% withholding tax. By claiming this amount in the consultant’s tax return, double taxation is avoided.
8. Invest in Tax-Exempt Instruments
Income from specific investments, such as infrastructure bonds, is exempt from tax.
Example: David invests KSh 1 million in a 10-year infrastructure bond with a 12% annual return. The KSh 120,000 interest earned yearly is tax-free, increasing David’s net income.
9. Strategize on VAT
Businesses can claim VAT input credits on taxable purchases, reducing the VAT payable to the KRA. Proper record-keeping is essential to ensure compliance and maximize claims.
Case Study: A retail store purchases inventory worth KSh 1 million, including KSh 160,000 VAT. After charging customers KSh 240,000 VAT on sales, the store offsets the input VAT, reducing its VAT liability to KSh 80,000.
10. Engage in Estate and Succession Planning
Proper estate planning ensures minimal tax exposure on wealth transfer. Establishing trusts or gifting assets during one’s lifetime can mitigate future tax obligations.
Example: A wealthy family establishes a trust to hold business assets, ensuring seamless transfer to heirs without attracting capital gains tax during succession.
Common Pitfalls in Tax Planning
Non-Compliance: Delayed filing or inaccurate returns can attract penalties and interest.
Improper Record Keeping: Inadequate documentation makes it challenging to claim deductions.
Overlooking Tax Changes: Tax laws in Kenya frequently change, necessitating regular updates.
Tax planning is a dynamic and integral part of financial management. By understanding Kenya’s tax laws and adopting effective strategies, individuals and businesses can legally minimize tax liabilities while achieving financial goals. Seeking professional advice from tax consultants or accountants like David and Associates and others is advisable for tailored solutions.
Through real-life examples and practical case studies, this article underscores the importance of proactive tax planning in navigating Kenya’s tax landscape with the latest amendments in the Tax Laws Amendment Act, 2024.
About the Author
Dr. David Onguka brings more than 26 years of expertise in finance, tax, audit, and management to his role as Managing Partner at David & Associates - Certified Public Accountants. His extensive experience includes serving as General Manager and Group Chief Financial Officer at Ainushamsi Energy Limited for 6 years, as well as holding similar positions at Jaguar Petroleum Limited for five years. He began his career as an Audit Senior at PKF Kenya and was Finance Manager at Gapco Kenya Limited for seven years. He holds PhD in Finance from University of Nairobi (UON), MBA in Finance, CPA(K) and CPS(K). He is also a researcher, author, publisher and practicing member of ICPAK and Institute of Certified Secretary (ICS).
For inquiries, you can reach him at or link to our website: www.davidandassociates.co.ke or visit at at West Park Towers, 2nd floor, Mpesi Lane off Muthithi Road, Westlands.
