Payroll processing in Kenya involves more than just paying employees their salaries. Employers must correctly calculate and remit four statutory deductions: PAYE to KRA, SHA, NSSF, and the Housing Levy. Getting any of these wrong exposes the business to penalties and legal action. This guide walks through the entire process from gross salary to net pay.
Step 1: Determine Gross Salary
Gross salary is the total compensation before any deductions. It includes basic salary, house allowance, transport allowance, overtime pay, commissions, and bonuses. If your company provides non-cash benefits such as a company car or housing, the taxable value of these benefits must also be included. Gather all compensation data for each employee before proceeding.
Step 2: Calculate NSSF Contributions
NSSF is deducted before computing PAYE because it is a tax-exempt contribution. Calculate Tier I at 6% of pensionable earnings up to KES 7,000 (maximum KES 420) and Tier II at 6% on earnings between KES 7,001 and KES 36,000 (maximum KES 1,740). Both the employee and employer contribute equally. The employee's total NSSF deduction of up to KES 2,160 is subtracted from gross pay to arrive at taxable income.
Step 3: Compute PAYE
Subtract the employee's NSSF contribution and any other allowable deductions (pension contributions, mortgage interest) from gross salary to get taxable income. Apply the graduated tax bands: 10% on the first KES 24,000, 25% on KES 24,001-32,333, 30% on KES 32,334-500,000, 32.5% on KES 500,001-800,000, and 35% on income above KES 800,000. Then subtract personal relief of KES 2,400 and any applicable insurance relief.
Step 4: Determine SHA Contribution
SHA is based on the employee's gross salary using a fixed bracket system. Look up the appropriate contribution from the SHA table. For example, an employee earning KES 50,000 contributes KES 1,200 per month. SHA is deducted after PAYE computation -- it does not affect taxable income.
Step 5: Deduct the Housing Levy
Calculate the Housing Levy at 1.5% of the employee's gross salary. The employer contributes an additional 1.5%. Like SHA, the Housing Levy is deducted after PAYE and does not reduce taxable income. Both amounts are remitted together through iTax.
Step 6: Calculate Net Salary
Net salary is what the employee takes home after all deductions. The formula is: Net Salary = Gross Salary - PAYE - Employee NSSF - SHA - Employee Housing Levy - Any other deductions (loans, salary advances, union dues). Always provide each employee with a detailed payslip showing the breakdown.
| Item | Amount (KES) |
|---|---|
| Gross Salary | 80,000 |
| Less: NSSF (Employee) | (2,160) |
| Taxable Income | 77,840 |
| Tax on First 24,000 @ 10% | 2,400 |
| Tax on Next 8,333 @ 25% | 2,083 |
| Tax on Remaining 45,507 @ 30% | 13,652 |
| Total Tax | 18,135 |
| Less: Personal Relief | (2,400) |
| Net PAYE | 15,735 |
| Less: SHA | (1,500) |
| Less: Housing Levy (Employee 1.5%) | (1,200) |
| Net Salary | 59,405 |
Remittance Deadlines and Filing
- PAYE and Housing Levy: Remit to KRA via iTax by the 9th of the following month.
- SHA: Remit via the SHA portal or M-Pesa by the 9th of the following month.
- NSSF: Remit via the NSSF portal or bank by the 15th of the following month.
- Keep copies of all payment receipts and filing confirmations for at least 7 years.
- Issue P9 tax certificates to employees by February 28th each year for the preceding tax year.