Employer can help you save on taxes

A clerk at the KRA headquarters receives tax return forms. Photo/FILE 

By JOHN KIGATHI

“Like it or not, you have to pay your taxes. The trouble is that understanding taxation requires more than a genius mind, ’’ said Albert Einstein, voicing a truth almost a century ago, that is so real to the Kenya situation.

How much do people really understand about taxation, other than that money is deducted from their incomes by the State monthly or yearly?

Yet, knowledge on taxation and avoidance is important if you are to make any savings on your taxes and reduce on the amount you have to pay to KRA.

Life insurance

Among the various ways employees can save on their taxes is through tax planning and avoidance options that employers can take under the Income Tax Act.

Most employers have ignorantly or innocently ignored these options, yet they have no negative effects on shareholders wealth.

Among these opportunities is that of non-cash benefits of up to Sh36,000 per year that an employer can give to an employee tax free.

A friend who works in an electronic shop got a bonus amounting to Sh35,000. He wanted to buy a home theatre from his employers’ shop since he was sure about its quality and performance. The bonus was paid together with his December salary and the total taxable pay amounted to Sh75,000.

He bought his dream home theatre for Sh25,000, however, he did not realise that the bonus had come with a tax burden of Sh10,500.

Had the employer told my friend to take electronics worth Sh25,000, no tax would have been borne by either him or the employer, provided no other non-cash benefit had been given in the year.

Many people have been put in such tax grids by their employers, when obvious tax planning measures were all that were needed. That long cherished micro-wave, mobile phone, ipod phone from your employer is better than that bonus on your payslip.

If you have limited private use of a company car, your employer has the right to apply to the commissioner of domestic taxes to charge you at a lower rate than 2 per cent of the cost of the car.

Reimbursement of mileage and disbursement incurred in the normal course of business should not be taxed.

Any interest paid on an owner-occupied mortgage housed is allowed for tax purposes up to a maximum of Sh12,500 per month. The mortgage should be from approved banks and financial institutions.

The Income Tax Act also exempts from tax money contributed through home ownership plans for purposes of acquiring or building a house to a maximum of Sh4,000 per month.

If an employee has taken a life insurance package, including health and education policies, 15 per cent of the premiums paid are allowable up to a maximum of Sh60,000 Pension contributions to a registered retirement body are exempted up to a maximum of Sh240,000 per year.

If you think your employer has plans to pay you a bonus, suggest to the concerned that a cheque to a college where you are taking your post graduate diploma in marketing or whatever, will be more appropriate.

Education costs on staff by their employer to advance their career in their areas of operation is tax allowable.

Tax saving measures would also in some cases depend on your job terms and conditions.

You do not necessarily require a pay increase but knowledge of tax saving measures and an employer who will go the extra mile to research and implement them.

The lack of tax knowledge has seen many employees get a gross pay hike but an almost nil net increase.

John Kigathi is a Senior Tax consultant at Ernst & Young