How to Prepare Payroll in Kenya: A Detailed Guide

Preparing payroll in Kenya requires careful calculation, proper record-keeping, and compliance with government regulations. This guide provides a step-by-step process to help you prepare accurate payroll, including an example for an employee earning a gross salary of Ksh 50,000.

Step 1: Understand the Components of Payroll in Kenya

Payroll calculation in Kenya involves:

• Gross Salary (Total earnings before deductions)
• Statutory Deductions (PAYE, NSSF, SHIF, Housing Levy)
• Net Salary (Take-home pay after deductions)

Step 2: Calculate Gross Salary

Gross salary includes the following;

• Basic salary
• Allowances (house, medical, transport, etc.)
• Bonuses and commissions

Example:

For better understanding of how payroll is being prepared, we are going to look at an example of someone who gross salary of Ksh 50,000. As this the typical salary that most employee earns in Kenya.

Step 3: Compute Statutory Deductions

Kenyan law requires four key deductions:

1. Pay As You Earn (PAYE)

Kenya revenue authority is an authority that is responsible for collection of taxes in Kenya . They provide guidelines to business of how to collect the taxes, rates to use and when to send those collected taxes. PAYE is calculated based on income tax bands provided by the Kenya Revenue Authority (KRA):

• Up to Ksh 24,000 = 10%
• Ksh 24,001 to Ksh 32,333 = 25%
• Above Ksh 32,333 = 30%

Example PAYE Calculation for Ksh 50,000 Salary:

• First Ksh 24,000 @ 10% = Ksh 2,400
• Next Ksh 8,333 @ 25% = Ksh 2,083
• Remaining Ksh 17,667 @ 30% = Ksh 5,300
• Total PAYE Before Relief: Ksh 9,783
• Less Personal Relief: Ksh 2,400
• Net PAYE Payable: Ksh 7,383

2. National Social Security Fund (NSSF)

The National Social Security Fund (NSSF) is a government-mandated institution that provides social security benefits to workers in Kenya. The main function of the NSSF is to collect and manage contributions from employers and employees, which are then used to provide financial assistance in the event of retirement, disability, illness, or death.

NSSF’s key roles include:

1. Pension benefits: Provides retirement savings to employees through mandatory monthly contributions, which are paid out to employees when they retire.
2. Disability benefits: Offers support to workers who are unable to work due to disability.
3. Survivor benefits: Provides support to the dependents of workers who pass away.
4. Sickness benefits: Covers a portion of income lost due to illness for workers.

NSSF Contribution Rate in Kenya:

The NSSF contribution is now calculated at 6% of gross salary.

For Gross Salary of Ksh 50,000: 6% of Ksh 50,000 = Ksh 3,000

3. Social Health Insurance Fund (SHIF)

The SHIF stands for Social Health Insurance Fund, which is an initiative in some countries, such as Kenya, aimed at providing universal health coverage. The fund is designed to provide financial assistance for healthcare services to the population, especially for those who are employed and contributing to the system.

In Kenya, the Social Health Insurance Fund (SHIF) is part of the government’s push towards providing universal health coverage through a mandatory insurance scheme.

Key Roles of SHIF:

1. Health Coverage: It helps cover medical expenses for contributors, ensuring that individuals and their families have access to healthcare services without incurring catastrophic financial expenses.
2. Equitable Health Financing: By pooling contributions, SHIF helps distribute healthcare costs more evenly across society, aiming to reduce financial barriers to healthcare access for lower-income individuals.
3. Access to Health Services: Contributors to the SHIF are typically able to access a broad range of health services, including outpatient services, hospitalization, surgery, and sometimes specialized treatments, depending on the level of coverage.

SHIF Contribution Rates in Kenya:

As of now, the contribution to the Social Health Insurance Fund (SHIF) is set at:

• Employee Contribution: 2.5% of their monthly salary.
• Employer Contribution: 2.5% of the employee’s monthly salary.

So, a total of 5.5% of the employee’s monthly salary goes towards the SHIF, with 2.75% coming from the employer and 2.75% from the employee.

SHIF replaced NHIF and is now calculated at 2.75% of gross salary.

For Gross Salary of Ksh 50,000: 2.75% of Ksh 50,000 = Ksh 1,375

4. Housing Levy

The Housing Levy is part of Kenya’s initiative to improve affordable housing in the country. It was introduced as part of the government’s Big Four Agenda, which focuses on four main areas: affordable housing, universal health coverage, manufacturing, and food security. The Housing Levy is aimed at creating a fund to support the construction of affordable housing and improve access to home ownership, particularly for low- and middle-income Kenyans.

Key Roles of the Housing Levy:

1. Affordable Housing Fund: The levy aims to create a fund that will be used to finance the construction of affordable housing for Kenyans, especially in urban areas. This is part of the government’s effort to address the housing shortage in the country.
2. Affordable Homeownership: It is designed to enable more Kenyans to own homes by making affordable housing projects available, particularly to those who might otherwise struggle to afford market prices.
3. Support for Construction Projects: The collected funds will be used for infrastructure development and to assist in the creation of sustainable, low-cost housing developments across the country.

Housing Levy Contribution Rate:

As of 2023, the Housing Levy is set at:

• Employee Contribution: 1.5% of the employee’s monthly gross salary.
• Employer Contribution: 1.5% of the employee’s monthly gross salary.

Thus, a total of 3% of an employee’s gross monthly salary is contributed to the Housing Levy, with 1.5% being paid by the employee and 1.5% by the employer.

The Housing Levy is 1.5% of the employee’s gross salary.

For Gross Salary of Ksh 50,000: 1.5% of Ksh 50,000 = Ksh 750

Step 4: Calculate Net Salary

Net Salary = Gross Salary – Total Deductions

For Gross Salary of Ksh 50,000:

• Gross Salary = Ksh 50,000
• Less PAYE = Ksh 7,383
• Less NSSF = Ksh 3000
• Less SHIF = Ksh 1,375
• Less Housing Levy = Ksh 750

Net Salary = Ksh 37,492

Step 5: Prepare Employee Payslip

A payslip should clearly outline:

• Employee details (Name, ID, Position)
• Gross salary breakdown
• All deductions (PAYE, NSSF, SHIF, Housing Levy)
• Net salary (final take-home pay)

Step 6: Submit Deductions to Relevant Authorities

Employers must remit deductions as follows:

• PAYE – via KRA’s iTax portal by the 9th of the following month
• NSSF – via NSSF portal by the 9th of the following month
• SHIF – via SHIF portal by the 9th of the following month
• Housing Levy – via KRA’s iTax portal by the 9th of the following month

Step 7: Penalties for Non-Compliance

Failure to remit statutory deductions on time may result in penalties:

• PAYE: 25% of the unpaid tax amount plus Ksh 10,000 fine or imprisonment.
• NSSF: 5% of the unpaid amount for every month of delay.
• SHIF: 10% of the unpaid amount.
• Housing Levy: 3% of the unpaid amount.

Step 8: Maintain Accurate Records

Kenyan labour laws require employers to keep payroll records for at least five years. These records must include employee details, salary breakdown, and proof of remittances.

Key Tips for Payroll Accuracy

• Use cloud-based payroll software to automate calculations.
• Stay updated with KRA tax rates, SHIF, and NSSF adjustments.
• Always verify employee details before processing payroll.

Conclusion

Preparing payroll in Kenya requires strict attention to statutory regulations and detailed calculations. By following these steps, you can ensure accurate salary processing, protect your business from penalties, and maintain employee satisfaction. For efficient payroll management, consider using payroll software that automates calculations and generates compliant payslips.