In most cases, there are several incentives that are part of the employment income. The incentives may include cash emoluments paid in form of allowances. As the name suggests, these are employment perks paid by way of cash. Examples of such emoluments include leave pay, salary, wages, sick pay, payment in lieu of leave, fees, commissions, bonus gratuity, subsistence, travelling, entertainment or any other form of payment arising from employment or services rendered paid in form of cash. Employees who do not know that such payments are taxable are often surprised to note that tax deductions have been made on their final pay. Cash benefits are subject to taxation as provided for in Section 3 (2) (a) (ii) read together with section 5(2) (a) of the Income Tax, Cap 470.

Cash allowances made to employees may vary from one employer to another. In most cases, terms of employment and company policy determine the allowances that an employee shall be entitled from those provided above among others. On the other hand, the said policy, in addition to cash allowances shall specify other non-cash benefits which could either be taxable or exempt. This include employer’s contributions to NSSF or retirement benefit schemes, school fees taxed on the employer (exempt), facilities, advantages or benefits provided whose total value when not in excess of
KShs. 3,000 is exempt but taxable wholly when it exceeds such per month.

There are other components of non-cash emoluments which an employer may extend to his employees which are taxable as part of employment income including provision of housing or motor vehicles. The value taxable on housing is 15% of taxable pay excluding such housing or the amount paid by employer on such housing if provided by a third party or market value of the house if provided by the employer which is higher.   

It is important to note that there are some instances where some benefits are not taxed. One such instance is the amount paid to an employee when outside their usual place of work but on official duty, also known as per diem. In this case, the first KShs. 2,000 paid to an employee per day is not taxable. It is treated as reimbursement of expenses. A second instance is payment of gratuity into retirement schemes registered by the Commissioner. The amount paid is not taxable up to the limit of KShs. 240,000 per year.

Following the enactment of Finance Act 2020, tax exemption on bonuses, overtime allowance and retirement benefits for employees whose salary does not exceed the lowest tax bracket is no longer applicable. These benefits are now taxable regardless of the amount earned as long as the total income of a person including such allowances and benefits falls within the tax bracket.

Conventionally, cash and non-cash benefits goes a long way in motivating employees. All the same, it is important to know which of these benefits are taxable and the ones that are tax exempt. That way, one would not feel short-changed after receiving compensations for employment that is less than expected or budgeted for.