KRA Dismisses Kenyans' Hopes Of Higher Take-Home Pay After SHIF Deductions

But KRA clarified that the change is outlined in the current stipulations of the Income Tax Act. Previously, the Income Tax Act allowed people to claim tax relief on contributions to the National Health Insurance Fund (NHIF), as long as their policy started on or after January 1, 2007. For employees, this relief is capped at a maximum of Ksh255 per month, which is 15 per cent of the NHIF contribution amount of Ksh1,700. 

Under the Finance Act, 2021, an amendment to Section 31(1) of the Income Tax Act (ITA), Cap 470, extended insurance relief to include NHIF contributions. According to the amendment, relief covered 15 per cent of insurance premiums plus NHIF contributions, capped at Ksh5,000 per month or Ksh60,000 per year. This amendment took effect on January 1, 2022.

However, with NHIF now replaced by SHIF, KRA explained that this tax relief does not currently apply to SHIF contributions. "The relief as currently provided under the Income Tax Act does not apply to contributions made to the SHIF under the Social Health Insurance Act," KRA sought to set the record straight.

It noted that there is a proposal in the 2024 Tax Laws (Amendment) Bill that, if passed, would allow people to deduct SHIF contributions from their taxable income in the future, providing a similar tax benefit. However, the authority said this has not yet become law, so the tax relief does not apply to SHIF contributions as of now.

"The relief as currently provided under the income tax does not apply to contributions made to the SHIF under the Social Health Insurance Act", KRA clarified in the notice, adding "The Tax Laws (Amendment) Bill, 2024 has proposed an amendment to the law to provide for a deduction of the SHIF contributions against taxable income."

Beginning in January 2022, workers enjoyed Ksh300 million tax relief on NHIF contributions. A report by the National Treasury on tax expenditures – or foregone taxes by the state due to tax reliefs – showed that insurance relief increased significantly by 31.1 per cent in 2022 as compared to 2021.

"The increase is attributed to the introduction of relief on NHIF contributions through the Finance Act, 2021, that amended Section 31 (1) of the Income Tax Act to allow for relief on contributions to NHIF, effective from January 1, 2022," the National Treasury said. Insurance relief also increased from Ksh652.75 in 2021 to Ksh856.17 last year, boosted by increased contributions to the state-backed insurer.

As of now, the SHA contributions mandate every employee to be deducted a monthly statutory deduction contribution to the Social Health Insurance Fund at a rate of 2.75 per cent of the gross salary or wage of the household by the 9th of each month. According to SHA gross salary or wage for a household whose income is derived from salaried employment includes basic salary and allowances paid to an employee on a regular basis as a salary or a wage.

With this clarification, Kenyans who hoped that they'd get more money to take home every month will have to wait a bit longer, given that they have been for months decrying tough economic times worsened by their pay slips being reduced even further with the SHIF deductions, a matter which leads to a ripple effect as reduced pay means reduced spending power, worsening an already ailing economy in Kenya.