President William Ruto has added another layer to his plan to increase the country’s savings, with three changes to the current laws on retirement benefits.
With changes targeting the Income Tax Act, the Kenyans seeking to cash their pensions will soon be exempt from paying taxes. The move will mark a relief to pensioners who have waited for up to 15 years to access their pension benefits tax-free.
However, that is not the only change being mooted. The Treasury, under the proposed amendments, aims to allow individuals aged 38 and older to access their pension tax-free, provided they have been a member of the scheme for at least 20 years.
Currently, only those aged 65 and older are eligible for tax exemptions on their pension payouts. Any lump sums and pension payouts beyond the age of 65 are tax-free.
President William Ruto, accompanied by Treasury CS John Mbadi at the Inua Biashara MSME Exhibition at the KICC in Nairobi on October 17, 2024. PHOTO/ William Ruto
Furthermore, under the new proposals tabled in the National Assembly by Majority Leader Kimani Ichung’wah, the government proposes to raise deductible pension contributions from Ksh20,000 to Ksh30,000 monthly.
The proposal will raise the deductible pension or provident funds by Ksh120,000 per year to a new limit of Ksh360,000.
“The Bill proposes to amend the Income Tax Act to increase the amount deductible in respect of contributions to registered pension or provident funds from taxable income of an individual and also contribution by the employer from Ksh240,000 to Ksh360,000 per year and Ksh20,000 to Ksh30,000 per month,” Treasury said in the tax laws amendment bill.
The increase on deductible pension contributions has the potential to raise savings by Kenyans,
as more workers could consider increasing their contributions.
This is because this change will increase the non-taxable income of an individual in favour of pension contributions, earning Kenyans tax benefits of thousands of shillings.
In an explainer shared by Treasury, the government argues that the move “aims to boost contributions to registered pension funds for self-employed individuals or those not affiliated with a registered pension scheme.”
In the current laws, anyone above 50 years, but below 65 is granted the Ksh600,000 free of tax, with the next Ksh1.6 million attracting between 10 and 25 per cent in taxes while amounts above that are hit with a 30 per cent tax rate.
Currently, taxable amounts are subject to a 10 per cent rate for the first Ksh400,000, followed by a 15 per cent rate for the next Ksh400,000, and 20 per cent for an additional Ksh400,000.
This means a total of Ksh1.2 million is taxed at rates ranging from 10 per cent to 20 per cent. Any amount exceeding Ksh1.2 million is taxed at 25 per cent.
The Bill is still in the public participation stage before being read again at the National Assembly.
Members of the National Assembly during a recent parliamentary session.