A Complete Guide to Kenya's Payroll

Kenya currently has one of the most lucrative talent policies in Africa. With an above 80% literacy rate and numbers increasing thanks to government efforts, companies have the opportunity to curb the talent shortage.

Kenya has significant industries such as manufacturing, energy, and agriculture. It also has a well-developed infrastructure, including fast and affordable internet. However, employers who want to expand their business operations in Kenya while hiring talent should understand the country’s payroll.

Kenya has a distinct payroll system. Understanding the system is key to smooth talent acquisition and retention. More importantly, it ensures compliance with the country's regulations. The following is a guide to Kenya payroll that will assist in maintaining compliance. It covers everything from the key components of payroll to Kenya payroll calculators. 

Key Components of Payroll in Kenya

Understanding payroll is crucial for employers operating within the country or with residing workers. In Kenya, payroll consists of various components that determine how much an employee earns and the deductions from their salary. Here is an in-depth overview of these key components.

Basic Salary

The basic salary is the fixed amount paid to an employee every month before any additions or deductions. It is the core part of an employee’s earnings, agreed upon when hired. For instance, if a job contract states that an employee will be paid Kshs 50,000 per month, that’s their basic salary. In Kenya, the average basic salary is approximately Kshs 30,000 for entry-level employees. 

Allowances

Allowances are all the extra payments given to employees to cover specific needs. Common allowances in Kenya include house allowance, commuter allowance, and medical allowance. These amounts are typically added to the basic salary. For example, if an employee earns Kshs 30,000 while receiving a house allowance of Kshs 10,000 and a commuter allowance of Kshs 5,000, it will bring their total monthly earnings to Kshs 45,000.

Overtime Pay

When employees in Kenya work beyond their regular hours, they are entitled to overtime pay. Overtime also applies to normal rest days and public holidays. It is not a requirement, and the employee must agree to it. 

In addition, overtime pay is usually calculated at a higher rate than the standard pay rate to compensate for the extra hours worked.

Kenyan employees are entitled to at least one and one-half times the employee’s normal wage for overtime. Furthermore, the rate is twice the normal hourly rate for any time the employee works on a rest day or public holiday. 

Deductions

Deductions are amounts taken out of an employee’s salary for various reasons. However, overall, it reduces the gross (total) income and, thus, the overall taxes an employer pays. These deductions ensure that employees contribute to essential services and social security. The following are the most common deductions for Kenyan employees:

• Pay As You Earn (PAYE): Like in other countries, PAYE in Kenya is a tax deducted based on an employee’s earnings, which contributes to national revenue.
• National Social Security Fund (NSSF): In Kenya, NSSF is a retirement fund where both the employee and employer contribute equally. The rate differs according to tiers of earnings. 
• National Hospital Insurance Fund (NHIF): This health insurance contribution is deducted based on an employee’s salary.

Net Pay

Net pay is the actual amount an employee takes home after all additions and deductions. To acquire net pay, employees should sum the basic salary with the allowances and then subtract the total deductions. 

What is Deducted from Salary Kenya?

One of the core principles that all employers must understand is statutory deductions. Statutory deductions are mandatory amounts an employer takes from an employee’s salary and remits to various government agencies. Failure to remit these amounts usually attracts fines and other legal action. All employers in Kenya should pay attention to the following:

Pay As You Earn (PAYE)

PAYE is an income tax deducted directly from an employee’s salary. The rates are progressive, meaning the more an employee earns, the higher their tax rate. As of July 2023, the rates range from 10% for the lowest income bracket to 35% for the highest. This system ensures everyone contributes a fair share based on earnings, supporting public services and infrastructure.

National Social Security Fund (NSSF)

The NSSF is a compulsory savings scheme aimed at providing social security for workers upon retirement. The employer and the employee contribute 5.6% of the employee’s gross salary each, up to a maximum of Kshs 2,160 per month. Meanwhile, the minimum contribution is Kshs 720. The contribution amount depends on whether the employer is in tier 1 or 2. 

National Hospital Insurance Fund (NHIF)

The NHIF is Kenya’s primary health insurance scheme, providing medical coverage to employees and their dependents. Contributions to NHIF are based on the employee’s gross salary, ranging from Kshs 150 to Kshs 1,700 per month. This deduction ensures that employees have access to healthcare services. It is important to note that as of July 2024, the Social Health Insurance Fund (SHIF) will replace this system. All employees will be required to contribute 2.75% of their income to the fund.

Higher Education Loans Board (HELB) Loan Deductions

For graduates who have benefited from HELB loans, a portion of their salary is deducted to repay these loans. The repayment amount depends on the loan balance and the agreed-upon repayment plan. This deduction is crucial for sustaining the fund. All employers are responsible for withholding the amount.

National Industrial Training Authority (NITA) Levy

The NITA levy is less known but is a training fee paid by employers at Kshs 50 per employee per month. This fee supports industrial training programs, helping to enhance the skills and productivity of the workforce. Employers are responsible for registering employees and deducting the amount from their salary. 

Housing Levy

The newly introduced housing levy is aimed at helping employees pay for affordable housing in the country. Kenyan laws require employees and employers to make a monthly contribution of 1.5% of the employee’s gross salary. Thus, it is a 3% deduction. 

Payroll Management Process in Kenya

Managing payroll in Kenya involves several critical steps to ensure employees are paid accurately and on time while complying with statutory requirements. It is the employer’s responsibility, and the process often goes as follows: 

Employee Information Collection

The first step in managing payroll is gathering and maintaining accurate employee information. It includes personal details, employment start dates, job titles, salary levels, and statutory registration numbers such as the KRA PIN, NSSF number, and NHIF number.

Employers should also document voluntary deduction agreements, such as pension contributions and Sacco memberships.

Salary and Allowances Calculation

The next step is calculating each employee's gross pay, including the basic salary plus any allowances. For employees who have worked overtime, ensure that the additional hours are correctly calculated and added to the gross pay. Employers can use an effective Kenya payroll calculator to eliminate the risk of incorrect calculations. 

Statutory Deductions Calculation

Next, employers should deduct the mandatory statutory contributions from gross pay. This will include all the mentioned statutory dedications. Employers should also be on the lookout for the implementation of new rates and deductions. For example, SHIF will soon take effect, rendering NHIF invalid. 

Voluntary Deductions Calculation

While it may not apply to every employee, employers in Kenya should calculate any voluntary deductions agreed upon by the employee. These include pension and Sacco contributions, personal loan repayments, and insurance premiums. 

Payslip Generation

After making all the necessary deductions and calculations, employers can now generate payslips for each employee detailing the breakdown of their salary, including the gross pay, all deductions, and the net pay. Good payroll software can generate this information while administering payroll. 

Statutory Remittances and Filing

The last step in the payroll process in Kenya is ensuring that all deducted amounts are remitted to the respective statutory bodies within the specified deadlines as follows:

• PAYE: Remit to KRA on or before the 9th day of the following month.
• NSSF: Remit contributions by the 9th of the following month.
• NHIF: Remit contributions by the 9th of the following month.
• HELB: Remit loan repayments by the 15th of the following month.
• Housing Levy: Remit to KRA by the 9th working day of the following month. 

Record Keeping

While it is not a legal requirement, employees are advised to maintain comprehensive payroll records for each employee. These records should include payslips, deduction summaries, remittance receipts, and any payroll-related correspondence. Proper record-keeping is essential for compliance, audits, and future reference. Therefore, it’s always best to maintain a database of this information. 

Worth Noting: Personal Identification Number

The KRA Personal Identification Number (PIN) is a requirement for all institutions and businesses. According to country regulations, all employers must obtain a KRA PIN to manage payroll in the country. In addition, the business must be registered per the country's business registration regulations. 

Insight on Kenya Payroll Calculator

With laws constantly changing and the government adding new deductions, it is easy for employers to make mistakes in their calculations. This is why many more businesses are opting for Kenyan payroll software or calculators.

As the name suggests, a payroll calculator simplifies calculating salaries, taxes, and deductions. A payroll calculator in Kenya automates the payroll process, ensuring accuracy and efficiency. 

Pros of Using a Payroll Calculator

Using a good payroll calculator can have the following advantages:

• Reduced Errors. Payroll calculators minimize human errors by automating complex calculations. It ensures employees receive accurate payments and that employers calculate and remit statutory deductions correctly.
• Updated Tax Rates. Good providers frequently update their payroll software to reflect the latest tax laws and rates, ensuring compliance with the most current regulations.
• Time-Saving. Automating payroll calculations reduces the time spent on payroll processing, allowing HR and finance teams to focus on other tasks.
• Quick Calculations. Instant calculations help in generating payslips and financial reports faster. Employees get paid on time, and employers meet their remittance deadlines easily. 
• Regulatory Adherence. Payroll calculators help businesses comply with Kenyan tax laws by accurately calculating PAYE, NSSF, NHIF, and other statutory deductions.
• Reporting. Good payroll software often includes features for producing detailed reports, which may be handy during audits. In addition, the reports give employees insight into their tax tiers and deductions. 
• Reduced Administrative Costs. Businesses can reduce the need for extensive administrative staff and resources by automating payroll processes. These resources can be put to use for efforts that require more attention. 
• Ease of Use. A good payroll calculator is user-friendly, with interfaces that make payroll processing straightforward, even for those with limited accounting knowledge.

Cons of Using a Payroll Calculator

Employers risk facing several disadvantages from payroll software. Some potential issues include:

• Setup Challenges. Setting up a payroll calculator can be complex and require a lot of time, especially if it does not integrate with existing systems. An HR professional may end up spending a lot of time inputting employee dates and configuring settings according to company policies.
• Training Required. HR professionals responsible for payroll calculators might need training to use the tool effectively. Depending on the calculator, it could require additional time and resources.
• Hidden Costs. With a payroll calculator, there is always the risk of additional costs for updates, maintenance, or customer support. These costs make the software impractical as it uses too much capital. 
• System Downtime. Technology is good but can fail easily. Kenya payroll software is no different. It relies on software and internet connectivity, making it vulnerable to technical issues or system downtimes that can disrupt payroll processing.
• Data Security. Security and privacy are growing concerns as the world becomes more reliant on technology. Storing sensitive employee data digitally raises concerns about data security and privacy. The wrong payroll software could mean data loss and non-compliance with data protection regulations.

A Kenya payroll calculator is a valuable tool for modern businesses, offering many advantages in terms of accuracy, efficiency, and compliance. However, to avoid drawbacks, it is important to select payroll software that offers comprehensive functionality and protection.

In addition, employers should learn about offline support availability, all costs, and whether the software requires training. Ultimately, the goal should always be to find high-functioning software within the company's budget with 24/7 support. 

Ensuring Compliance and Efficiency with Kenya Payroll Software

Understanding and managing payroll in Kenya is crucial for employers aiming to attract and retain top talent while maintaining compliance. By staying informed about statutory requirements and using reliable payroll software, employers can streamline their payroll processes and ensure timely and accurate employee payments.

Workpay’s PAYE calculator is the leading payroll calculator in Kenya. We have helped businesses pay employees accurately and remit deductions through an easy-to-use and regularly updated system. Get in touch to explore the benefits of our Kenyan payroll software.

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