Contributions made towards pension schemes are tax deductible. However, this should not deter you from saving up for retirement. There is a maximum tax deductible amount, and income that you earn from investments is tax free. The law in Kenya provides for tax relief benefits for contributions made towards a Retirement Benefits Scheme (RBS) to encourage more people to save for their post-retirement life.
In this article, we explore taxation on pension contributions and the tax relief you can benefit from as an employer or even as an individual.
Tax Relief on Pension Contributions
The Kenyan law allows for some tax relief to be granted on contributions made towards a pension scheme. However, the scheme needs to apply for tax exemption from the Commissioner of Domestic Taxes, during the registration of the scheme. This way, tax relief is applicable to any allowable contributions made into the scheme. The employer deducts the employee’s contribution before calculating tax.
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You are entitled to tax relief benefits regardless of whether you are saving in an occupational pension plan or an individual plan so long as you meet the following requirements:
- Contributions must be made to a scheme that is registered by the Retirement Benefits Authority (RBA).
- Contributions are not more than the amount specified in the law.
An employee can claim a deduction on taxable income based on their contribution to a registered RBS. The tax relief is chosen from any of the following:
- 30% of taxable income during the year, or
- Ksh. 240,000 per annum (Ksh. 20,000 per month)
The income earned through the investment of contributions made to a pension scheme is exempt from tax.
Employers who set up pension schemes and make contributions for their employees may be eligible for tax relief. According to Kenyan law, expenses incurred in the production of employee income are not taxable. Because pension is income for retired employees, contributions made by the employer are free from tax. This relief may help offset the cost associated with setting up a pension plan.
Eligibility for this relief depends on the type of occupational pension scheme chosen by the employer. For the umbrella scheme option, employers must ensure that the scheme chosen is registered with the Retirement Benefits Authority. If the employer decides to set up a stand-alone scheme, they are required to apply for tax exemption from the Commissioner of Domestic Taxes as an additional step.
The Kenya Revenue Authority allows a tax relief of up to a maximum of Ksh. 20,000 per month (Ksh. 240,000 per annum) for amounts contributed to a registered scheme.
Employers can easily switch between the two types of occupational pension schemes as this does not attract tax payments.
To encourage more people to begin planning for their future and increase the registration of retirement benefits schemes, the law in Kenya provides some tax relief for contributions made to pension plans. You can get started today. Don’t let the taxation on pension contributions deter you.