Cutting your tax burden

Taxpayers fill in tax returns forms. Financial experts say taking advantage of tax relief can help secure your finances. PHOTO/File 

By JANE KAGENDO

The only two things certain in life are death and taxes, so goes the pessimistic saying. While it’s true that there is no escaping either of the two, it is possible to cut down on the latter and add on to that advantage by earning compounded interest on the amount saved.

“It is possible to pay less income tax, a fact that many people fail to take advantage of while decrying the fact that they don’t have enough to save, to invest and achieve financial security and freedom,” says Mr Manyara
Kirago, the managing director of First Independent Advisers, a personal finance education provider.

“People often complain about how much income tax they pay, yet very few take steps to reduce it,” he notes.

This, personal finance experts say, can be achieved by taking advantage of tax laws. Mr Kirago enumerates several ways to reduce your tax burden while also achieving goals like home ownership with the savings made.

Pension plans

Most employers have employee retirement schemes. However, most employers will only contribute the mandatory minimum amount of five per cent towards it.

“If you are employed and your employer has a registered retirement benefit scheme which is a provident or pension scheme, you will notice that on your pay-slip, your contribution is deducted from your gross pay before income tax is calculated,” Mr Kirago says.

Putting away more than the minimum means killing two birds with one stone: you save money for a comfortable retirement and earn more interest on it.

Tax laws allow a maximum of Sh20,000, or 30 per cent of gross pay, to be deducted from gross salary before tax is calculated.

When Ms Mercy Kendi, who works as a consultant at a travel firm, started working she had no idea she could reduce her income tax by adding her pension fund to more than the 5 percent that had always been deducted.

“Now I put away Sh10, 000 and pay less income tax by about Sh3,200 per month,” she says. “I would have done this right from my first salary had I understood the implications back then.

I came to learn about this when the pension-backed mortgage came up and I sought advice on how to boost my fund so I could qualify for this mortgage.”

Self-employed people should be keen on putting away money for their retirement. “Most of them,” Mr
Kirago observes, “run their businesses for the rest of their lives and will always draw an income from it and so they don’t need to put away money for retirement.”

But the trouble with this is that “one might be involved in an accident that may render them unable to work or a business may fail or not yield returns as expected.”

It is also important to be putting away money in a registered personal pension plan. This are run by insurance companies.

Some available local include CFC Life Individual Pension Plan, ICEA Individual Retirement Benefits Scheme, Heritage AII Individual Retirement Benefits Scheme among others as well as fund managers like Zimele Personal Pension Plan and Amana Personal Pension Plan.

Home ownership savings schemes

Another income-tax saving opportunity is through saving in registered home ownership savings schemes. They are aimed at encouraging home ownership by giving tax incentives to individuals saving to buy houses

“Any money that is deposited into such a scheme, up to a maximum of Sh4,000 per month, is deducted from gross income before tax is calculated which means lower income tax,” says Mr Kirago. Couples can also pool resources and put Sh8,000 or Sh4,000 each into such an account.

Tax advantage

The other advantage is that the money accumulated in such a scheme earns tax-free interest.

Also, note that one is allowed to operate a home ownership scheme for a maximum of 10 years and the funds must be used to acquire a home. If the money is used for other purposes, the tax advantage is lost as taxes are charged on it.

These two are offered by insurance companies, mortgage companies and fund managers. Housing Finance, for example, offers First Hop and other mortgage financiers and banks have similar accounts.

“Note that this are different from house development funds which may be for a second home or commercial buildings,” he explains.

Mortgages

Mortgages, which many people have a morbid fear of, are another income tax reduction opportunity.

“If you are paying mortgage interest to a registered mortgage provider, you can claim income tax relief of up to Sh150,000 per year,” Mr. Kirago explains.

One only needs to acquire a certificate of interest paid that is issued by the mortgage provider after filling in the required information in the income tax return form, he explains.

A rare thing to happen when money comes in from Kenya Revenue Authority rather than flow out to the taxman.

Mr Kimani Muiruri didn’t believe this concept, thinking it was a decoy to lure people to take up mortgages, until his cheque came through.

He had been paying a mortgage for his home on Mombasa Road and submitted his income tax returns and a certificate of interest after being advised by his mortgage consultant.

“I forgot all about it and had to read the drawer’s name on the cheque thrice when it came,” he said in a interview recently.

“KRA had given me income tax relief of Sh78,000 on the mortgage payments I had been making.”

A number of mortgage finance providers and banks offering home ownership schemes include Housing
Finance, Savings & Loan, Investments and Mortgages Ltd, CfC Stanbic, Standard Chartered and Barclays banks.

Life insurance and education policies

Investing in a life insurance policy for nine or more years maturity can further reduce income tax as this qualifies you for income tax relief on the premiums paid.

“One can get relief amounting to Sh60,000 a year, or 15 percent of the premiums, whichever is lower,” Mr Kirago explains.

So while taxes are certain in life, you can certainly kill some of them and finish with that dream house, comfortable retirement, life or education fund.