Legal Tax Alert: Deduction of the Affordable Housing Levy by Employers

On 26th June 2023, the President assented to law the contentious Finance Bill, 2023 which brought a myriad of changes among them the affordable housing levy. I have used the word contentious because shortly after the Act was assented into law, its legality was challenged at the High Court of Kenya which subsequently suspended the implementation of the Act. However, in a turn of events, the Court of Appeal lifted the suspension orders on 28th July 2023.

The decision of the Court of Appeal has had an impact notably on the taxes that were to take effect on 1st July 2023 in line with the Act, one of the taxes being the affordable housing levy. Initially, the proposed Finance Bill, 2023 sought to introduce mandatory contributions to the National Housing Development Fund by both the employee and employer who were required to contribute 3% of the employee’s basic salary. However, the proposal was met with a lot of criticism by many Kenyans who felt that it would overburden employees in light of the current economic challenges.

After intense deliberations at the National Assembly, the housing fund contribution was converted into a housing levy. The levy is set at an uncapped rate of 1.5% of an employee’s gross monthly salary to be made by both employers and employees. Unlike the previous proposal that capped the contribution to a maximum of Kshs. 5,000.00, the levy is not capped and employees earning high salaries will contribute more to the fund. This is demonstrated as follows:

 Payable Gross Salary per month Employee contribution @1.5% Employer’s contribution @1.5%
Kshs. 30,000.00  Kshs. 450.00  Kshs. 450.00
Kshs. 70,000.00 Kshs. 1,050.00 Kshs. 1,050.00
Kshs. 150,000.00 Kshs. 2,250.00 Kshs. 2,250.00
Kshs. 250,000.00 Kshs. 3,750.00 Kshs. 3,750.00
Who is responsible for remittance?

The housing levy is a tax payable to the Kenya Revenue Authority. An employer is required to declare the levy in an employee’s PAYE return and make payment to KRA on or before the 9th day of the following month of deduction. It should be noted that P10 forms, that is the PAYE return forms, have now been updated to reflect the new PAYE rates and include the housing levy. Failure by an employer to declare and remit the housing levy to KRA makes them liable to payment of a penalty of 2% of the unpaid amount for every month the levy remains unpaid.

The lingering question remains, will the housing levy be applicable to the July 2023 salaries? The answer to this is yes.

The Cabinet Secretary for the Ministry of Lands, Public Works, Housing and Urban Development through a Public Notice dated 3rd August, 2023, appointed KRA as the collecting agent of the affordable housing levy and provided that with effect from 1st July 2023, all employers are required to deduct and remit the housing levy to KRA.

By the time the public notice was issued, most employers had already paid their July 2023 salaries to their employees without deducting the housing levy and providing for the new PAYE bands of 32.5% for salaries above 500,000.00 and 35% for salaries above 800,000.00. Employers who are yet to pay their employees are required to deduct the housing levy from the employee’s gross salary and remit the same amount together with the PAYE returns.

Employers who had already paid their July 2023 salaries to their employees without deducting the levy as required to:

  1. Calculate July 2023 PAYE return and Housing Levy based on the Finance Act, 2023 that is now operational;
  2. Remit the PAYE and levy before 9th August 2023(by Wednesday);
  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 installments)
  5. Ensure that the total deductions made do not exceed 2/3 of the employee’s salary (or other amounts as may be specified by the Cabinet Secretary responsible for labour matters).

For more information and assistance on compliance with different taxes, please get in touch with us today. Our team consists of highly qualified and experienced tax advisors who will provide expert guidance and ensure that you adhere to all relevant tax laws.

Written by Cynthia Kitolo
Legal Officer & Advocate of the High Court of Kenya

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