How new taxes will breach the one-third basic pay rule for thousands of workers
National Treasury and Economic Planning Cabinet Secretary Prof Njuguna Ndung’u poses with the briefcase containing the 2023/2024 budget statement at Treasury Building in Nairobi on June 15, 2023.
Richard*, a Nairobi-based public service worker, has a basic salary of Sh15,670. His pay rises to Sh24,720 after house, hardship and commuter allowances are included.
But after several deductions that include pension, National Health Insurance Fund (NHIF) and at least four bank loans, Richard, who sought anonymity to freely discuss his salary, takes home a meagre Sh5,224 (21.1 per cent of his gross salary and 33.3 per cent of his basic salary).
His payslip an eyesore by all measures, the man’s story is not far from another 25-year-old working for a private firm in Nairobi and who has found himself in a similarly tight financial spot. His payslip struggles to breathe in between growing statutory and non-statutory deductions, even as his personal expenses grow.
He wants his image protected, so we call him John*. He has a loan he took about two years ago to finance his master’s studies, later took other loans for some personal projects and saves a small portion of his salary at a Sacco monthly. This has left him constantly taking home less than half of his basic salary, which has been getting worse since early this year when a new law came into force, raising the National Social Security Fund (NSSF) contributions from Sh200 to 6.0 per cent of his salary, which left him paying Sh880 more.
“At the moment, after statutory deductions, loan repayments and savings, I receive less than half of my gross pay in my bank account, considering that I have been paying more to NSSF since February and with the housing levy coming next month, my earnings will shrink even further,” he says.
Plans ruined
“I had planned to complete servicing some of my loans so that I can access higher amounts for some personal projects, but I will have to postpone that because the increased deductions mean I won't finish paying my loans within the time I had planned. I am also considering reducing my monthly savings to ease the burden.”
The cases present the dilemma many employees find themselves in, as the government imposes more deductions on their payslips, which will reduce their take-home, and raise payroll costs even for employers. The new deductions include a 1.5 per cent housing tax that will be effective July 1 once President William Ruto signs into law the Finance Bill 2023. The proposed law also introduces new Pay As You Earn (PAYE) brackets, including a 35 per cent tax on income above Sh500,000 per month.
The implication of these extra deductions will be particularly harsh on employees whose net pay is barely on the one-third of basic pay threshold.
President William Ruto speaking at State House Nairobi on June 19, 2023. The new deductions include a 1.5 per cent housing tax that will be effective July 1 once President Ruto signs into law the Finance Bill 2023. The proposed law also introduces new Pay As You Earn (PAYE) brackets, including a 35 per cent tax on income above Sh500,000 per month.
The Employment Act, 2007, prohibits employers from deducting more than two-thirds of the basic pay from a worker. By servicing loans to run personal projects, for studies and other activities, workers have found themselves surviving on a third of the basic salary line. In some instances, many have already sunk below the threshold, which could be equated to the salary poverty line.
Over 10,000 public service workers earned below a third of their basic salaries in 2021/22 (National Government Ministries Departments and Agencies) and 2020/21 (County executives and assemblies). Yet, Section C.1(3) of the Human Resource Policies and Procedures Manual for the Public Service, 2016, states that “public officers shall not over-commit their salaries beyond two-thirds of their basic salaries and Heads of Human Resource Units should ensure compliance.”
In 2021/22, for instance, the National government had at least 2,271 officers earning less than a third of their basic salaries, a concern Auditor-General Nancy Gathungu raised. “Review of the Integrated Payroll and Personnel Database for the State Department revealed that some employees’ net payments were below 1/3 of their basic salary. Analysis for the month of February 2022 indicated that 111 officers received less than one-third of their basic salaries,” she stated in her report on the State Department of Infrastructure.
During the year, the State Department of Interior and Citizen Services, which employs police officers, had the highest number of workers taking home below one-third of their basic salaries (totalled 1,328). The State Law Office and the Department of Justice (244), the Ministry of Health (168), the Office of the Director of Public Prosecutions (ODPP), the Treasury (125) and Transport and Infrastructure (120) had the highest number of staff earning below the minimum threshold.
The Auditor-General warns that the practice is a breach of the law by the management of the institutions. Yet the problem is even more entrenched in counties, where both executives and assemblies are majorly affected, with thousands of workers going home with meagre pay, which is below the legal threshold, as they service loans amid other deductions.
In 2020/21 – the latest available audit reports – at least 20 counties had 7,814 workers taking home below a third of their salaries, led by Kiambu at 3,324 workers. The other counties include Marsabit (52), Nyeri (234), Trans Nzoia (865), Elgeyo Marakwet (197), Busia (248), Bomet (408), Uasin Gishu (292) and Kakamega (322 workers).
Non-compliance
“Review of payroll revealed that there were employees whose net salaries were not in compliance with the one-third rule on basic pay. For instance, in March 2021, 234 officers earned net pay that was less than a third of their basic pay,” the Auditor-General said, reviewing Nyeri County Executive.
Over 10,000 public service workers earned below a third of their basic salaries in 2021/22 (National Government Ministries Departments and Agencies) and 2020/21 (County executives and assemblies).
On Nandi, whose number of workers taking home below a third of basic pay was not disclosed, the Auditor-General observed that “over-commitment of salary may lead to pecuniary embarrassment of the public service contrary to the provisions of Section 19(3) of the Employment Act, 2007.”
The problem has also affected county assemblies, with at least 610 employees flagged by the Auditor-General in 2020/21, where Narok (138) and Baringo (113) had the highest number of cases.
“As reported in the previous year, analysis of the payroll for permanent employees indicated that the monthly salaries for 32 officers of the county assembly were less than one-third of their basic salaries due to deductions for loans and other non-statutory liabilities made on their gross pay,” the Auditor-General noted on the Trans Nzoia County Assembly. In the Kwale assembly, audit reports flagged cases where workers did not take anything home because of excessive deductions.
“Analysis of the payroll for the month of June 2021 revealed that net pay for 18 employees was less than a third of their basic pay. Further, eight employees earned zero salaries in some of the months,” the report stated.
Read also: Inside the big payslip lie by Kenya Kwanza
Mr Dan Okemwa, an advocate on labour matters, argues that additional deductions could force some employers to reduce other existing commitments on employees’ payslips to accommodate the statutory deductions, which could affect the savings and loan repayments of many workers. “An employer is permitted to make deductions from an employee’s salary provided the employee takes home not less than a third of his salary (Section 19:3 of the Employment Act, 2007). So what does an employer do when he receives a request for deduction from an employee, who is already on a net salary of a third?” he says.
“The employer must refuse and say the employee’s salary is already at the allowable minimum. However, if it is the kind that must be made, the employer must reduce one or more of the non-statutory deductions to accommodate the new compulsory deduction(s).”
Busia senator Okiya Omtatah – who went to court to object to several proposals in the Finance Bill, 2023, including the mandatory Housing contribution as it was named then – also observed that many workers are already earning a third of their basic salary.
“They are not factoring in issues like those who already have houses, those servicing mortgages and even the Employment Act itself, which says an employer is not allowed to deduct your salary to less than one-third of your income. Already, people are on one-third, people are surviving there. Have they done an audit to know when they introduce the levy whether it will go beyond that?” Mr Omtatah asked.
*Names changed to protect identities.
