CHAPTER FIVE
EMPLOYMENT INCOME
5.1 Introduction
Employment income is one of the specified sources of income chargeable to tax. Employees are
charged to tax on all benefits received from employment (both cash and non cash) Employers are
required to operate a pay as you earn scheme where all benefits chargeable to tax are assessed on
monthly basis on all employees.
5.2 Gains and Profits from Employment
Gains /profits from employment or services rendered will include both cash and non-cash
payments.
5.2.1 Cash Benefits
These include:
i. Wages, salary, leave pay, sick pay, payment in lieu of leave, directors' fees and other fees,
overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or
shorter intervals.
ii. Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance
etc.
iii. The amount of any private expenditure of the employee paid by the employer otherwise
than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees,
iv. Amount of subsistence, travelling, entertainment or other Allowance, however where the
Commissioner is satisfied that subsistence, travelling, entertainment or other allowance
represents solely the reimbursement to the recipient of an amount expended by him wholly
and exclusively in the production of his income from the employment or services rendered
then the calculation of the gains or profits of the recipient shall exclude that allowance or
expenditure;
v. Excess per diems. Cash allowances to employees working outside their work stations
popularly known as per diems in excess of Sh.2000 are taxable.
Illustration 5.2
Ali Baba is an employee of Tayari Ltd. During the year of income 2020, he received the
following benefits,
Salary Sh.120,000 (p.m)
Leave pay equal to one months pay
Hardship allowance Sh.14,000(p.m)
Responsibility allowance Sh.7,500(p.m)
Overtime Pay Sh.12000(p.m)
Required: determine his net tax liability for the year
5.2.2 Non cash employment benefits
(i) benefits in kind
Where an employee enjoys a benefit, advantage or facility of whatsoever nature in connection
with employment or services rendered; the value of such benefit should be included in
, employee’s earnings and charged to tax. The minimum taxable aggregate value of a benefit,
advantage or facility is Kshs. 3,000 per month or Kshs. 36,000 per annum.
(ii) ESOPs
In the case of an employee share ownership plan, the value of the benefit shall be the difference
between the market value per share and the offer price per share at the date the option is granted
by the employer. For clarification purposes, benefits arising from ESOPs not registered by the
Commissioner are taxable.
(iii)Car benefit – section 5 (2b)
Where an employee is provided with a motor vehicle by employer, the chargeable benefit for
private use shall be the higher of the rate determined by the Commissioner (based on the C.C
rating) and the prescribed rate of benefit. Where such vehicle is hired or leased from third party,
employees shall be deemed to have received a benefit in that year of income, equal to the cost of
hiring or leasing.
The “prescribed rate of benefit” is currently 2% per month of the initial cost of the motor vehicle
(iv) Provision of Servants
This include a house servant, a cook, watchman, gardener, an Ayah (maid), bodyguard,
messenger, chauffer etc. The values of such benefits are taxed on the higher between the market
cost and actual cost incurred by the employer, the employee is taxed on the higher.
(v) Provision of Services
They include water, telephone, electricity, furniture, alarm system etc. The CDT quantifies the
value of such benefits to the employee through the quantified benefits tables. Where the
quantified benefit is different from the cost of providing the service to the employer, whichever
is the greater shall be the taxable value.
Illustration 5.3
Wafula Wephukhulu is an engineer working for Afri-Elec consultants Ltd. The following
information relates to benefits received in the year of income 2020.
Cash benefits
Salary Sh.235,000 p.m (PAYE 55,000)
Annual bonus Sh. 450,000
Sick pay Sh. 120,000
Non cash benefits
Has a company car Nissan X-trail of 2000cc. This car cost Afri-Elec Sh.1800,000 in the
year 2009
He attended a ten day seminar in Nanyuki and received a daily cash allowance of
Sh.3,200
Was voted the employee of the year and was awarded an Ipad valued at Sh.120,000
Required: Determine Mr. wephukhulu’s net tax liability for the year of income 2020
(vi) Housing benefit - section 5(3)
The housing benefit for ordinary employees and a whole time service director shall be the higher
of 15% of total income (or employment income, in case of whole time service director), the fair
market rental value and the actual rent paid by the employer.
EMPLOYMENT INCOME
5.1 Introduction
Employment income is one of the specified sources of income chargeable to tax. Employees are
charged to tax on all benefits received from employment (both cash and non cash) Employers are
required to operate a pay as you earn scheme where all benefits chargeable to tax are assessed on
monthly basis on all employees.
5.2 Gains and Profits from Employment
Gains /profits from employment or services rendered will include both cash and non-cash
payments.
5.2.1 Cash Benefits
These include:
i. Wages, salary, leave pay, sick pay, payment in lieu of leave, directors' fees and other fees,
overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or
shorter intervals.
ii. Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance
etc.
iii. The amount of any private expenditure of the employee paid by the employer otherwise
than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees,
iv. Amount of subsistence, travelling, entertainment or other Allowance, however where the
Commissioner is satisfied that subsistence, travelling, entertainment or other allowance
represents solely the reimbursement to the recipient of an amount expended by him wholly
and exclusively in the production of his income from the employment or services rendered
then the calculation of the gains or profits of the recipient shall exclude that allowance or
expenditure;
v. Excess per diems. Cash allowances to employees working outside their work stations
popularly known as per diems in excess of Sh.2000 are taxable.
Illustration 5.2
Ali Baba is an employee of Tayari Ltd. During the year of income 2020, he received the
following benefits,
Salary Sh.120,000 (p.m)
Leave pay equal to one months pay
Hardship allowance Sh.14,000(p.m)
Responsibility allowance Sh.7,500(p.m)
Overtime Pay Sh.12000(p.m)
Required: determine his net tax liability for the year
5.2.2 Non cash employment benefits
(i) benefits in kind
Where an employee enjoys a benefit, advantage or facility of whatsoever nature in connection
with employment or services rendered; the value of such benefit should be included in
, employee’s earnings and charged to tax. The minimum taxable aggregate value of a benefit,
advantage or facility is Kshs. 3,000 per month or Kshs. 36,000 per annum.
(ii) ESOPs
In the case of an employee share ownership plan, the value of the benefit shall be the difference
between the market value per share and the offer price per share at the date the option is granted
by the employer. For clarification purposes, benefits arising from ESOPs not registered by the
Commissioner are taxable.
(iii)Car benefit – section 5 (2b)
Where an employee is provided with a motor vehicle by employer, the chargeable benefit for
private use shall be the higher of the rate determined by the Commissioner (based on the C.C
rating) and the prescribed rate of benefit. Where such vehicle is hired or leased from third party,
employees shall be deemed to have received a benefit in that year of income, equal to the cost of
hiring or leasing.
The “prescribed rate of benefit” is currently 2% per month of the initial cost of the motor vehicle
(iv) Provision of Servants
This include a house servant, a cook, watchman, gardener, an Ayah (maid), bodyguard,
messenger, chauffer etc. The values of such benefits are taxed on the higher between the market
cost and actual cost incurred by the employer, the employee is taxed on the higher.
(v) Provision of Services
They include water, telephone, electricity, furniture, alarm system etc. The CDT quantifies the
value of such benefits to the employee through the quantified benefits tables. Where the
quantified benefit is different from the cost of providing the service to the employer, whichever
is the greater shall be the taxable value.
Illustration 5.3
Wafula Wephukhulu is an engineer working for Afri-Elec consultants Ltd. The following
information relates to benefits received in the year of income 2020.
Cash benefits
Salary Sh.235,000 p.m (PAYE 55,000)
Annual bonus Sh. 450,000
Sick pay Sh. 120,000
Non cash benefits
Has a company car Nissan X-trail of 2000cc. This car cost Afri-Elec Sh.1800,000 in the
year 2009
He attended a ten day seminar in Nanyuki and received a daily cash allowance of
Sh.3,200
Was voted the employee of the year and was awarded an Ipad valued at Sh.120,000
Required: Determine Mr. wephukhulu’s net tax liability for the year of income 2020
(vi) Housing benefit - section 5(3)
The housing benefit for ordinary employees and a whole time service director shall be the higher
of 15% of total income (or employment income, in case of whole time service director), the fair
market rental value and the actual rent paid by the employer.
