The new Housing Levy under the Finance Act 2023. What to note ?

Following the Court of Appeal ruling that was made on 28th July 2023 lifting the suspension orders on the Finance Act 2023 we will have to amend the payrolls for July 2023 and factor in the housing levy deductions( note that this is an employee and employer deduction) as well as the new PAYE rates for employees earning Ksh 500,000 and above. This can be recovered from the employee’s salaries in August 2023 payroll.

What are the changes taking effect from 1st July 2023 ?

• introduction of the Affordable Housing levy at 1.5% of the Gross monthly salary matched by 1.5% by the employer. Please note that this levy is not capped; and
• introduction of PAYE at 32.5% and 35% for monthly incomes greater than Kshs. 500,000 and Kshs. 800,000 respectively.

Whereas the Finance Bill, 2023 proposed a Housing Fund contribution of 3% of the basic monthly salary capped at KShs 5,000, the Act established an uncapped levy at 1.5% of gross salary.
The delay of implementation of the Finance Act, 2023 and the charge of the levy on gross salary create three concerns for employers and employees which we shall address below:

1. What constitutes gross salary;
2. Whether the Housing Levy can be reduced by any relief;
3. How July 2023 salaries are affected by the Housing Levy and new PAYE bands;

1. What constitutes gross salary

The Housing Levy is established under the Employment Act, not the Income Tax Act. Therefore, the definition should be based on the Employment Act and relevant case law. Whereas Section 2 of the Employment Act defines the term “basic salary” as a gross salary less benefits and allowances it does not define the term “gross salary. However, the definition of gross salary can be deduced from the definition of basic salary as being the sum of basic pay, benefits and allowances. The Court of Appeal has upheld the same definition of the term “gross pay”.

In essence, gross salary refers to all sums, benefits and allowances due to an employee pertaining to employment services. Please note that gross pay does not include reimbursements for payments made on behalf of the employer.

2. Whether the Housing Levy can be reduced by any relief

The Affordable Housing Relief provided for the Income Tax Act is yet to be aligned to the Affordable Housing Levy and therefore the Relief will not be applicable.

3. How July 2023 salaries are affected by the Housing Levy and new PAYE bands

Some employers had already remitted July 2023 salaries by the time the Court of Appeal issued its Ruling. Their main concerns are whether the Housing Levy applies to the July 2023 salaries and how to account for the same on salaries that were already remitted.
The Housing Levy will be applicable to the July 2023 salaries. Employers who are yet to pay their employees should subject the July 2023 salaries to the levy and remit the same. Employers who had already paid their employees without deducting the levy should:

1. calculate July 2023 PAYE and Housing Levy based on the Finance Act 2023;
2. remit the PAYE and levy before 9th August 2023;
3. inform all employees that their July 2023 salaries contained overpayments made in error arising from the failure to deduct the additional taxes and levy;
4. inform employees that the overpayments will be recovered from their August 2023 salaries (or other suitable instalments)
5. ensure that the total deductions made do not exceed two thirds of the employee’s wages (or other amount as may be specified by the Cabinet Secretary responsible for labor matters)

Key points to note:

1. The Affordable Housing Levy is a mandatory contribution by all employees payable monthly at the rate of 1.5% of the employee’s gross monthly salary and is to be matched by the employer at the same rate with no capping.
2. The levy is to be computed on the gross pay which will be inclusive of allowances both cash and non-cash benefits advanced to the employee.
3. The Housing Levy cannot be reduced by the Affordable Housing Relief. However, payments for houses purchased under the Affordable Housing Scheme will be allowable as a relief against income tax.
4. The levy will be collected by Kenya Revenue Authority (KRA) and declared in the monthly Pay As You Earn (PAYE) return and paid together with PAYE.
5. The levy is due by the 9th day on the month following the month of deduction.
6. An employer who fails to comply with the provisions of the Affordable Housing Levy shall be liable to payment of a penalty of two percent of the unpaid amount for every month the same remains unpaid.

Please note that the P10 forms (PAYE return forms) have now been updated to reflect the new PAYE bands and Housing Levy