Introduction
The Finance Bill 2024 aims to bolster the nation’s tax base while simultaneously mitigating fiscal deficits. Notably, the bill introduces several new taxes and proposes amendments to existing legislation, particularly within the pensions sector. In this article, we delve into the proposed changes and their potential impact on pension schemes.
Increase in Tax-Deductible Pension Contributions
One significant proposal within the Finance Bill 2024 is the increase in the limit of tax-deductible pension contributions made by employees to registered pension schemes and provident funds. The current limit of Kshs. 20,000 per month is set to be elevated to Kshs. 30,000 per month. This adjustment aims to encourage individuals to save more for their retirement while enjoying tax benefits.
However, it’s crucial to note the conditions for tax exemption. The tax-exempt contributions made by an employee are capped at the lesser of the total contributions, 30% of the employee’s pensionable income, or Kshs. 360,000 annually (equivalent to Kshs. 30,000 per month). Contributions exceeding these limits will be subject to income tax.
Furthermore, if both an employee and employer’s combined contributions exceed Kshs. 30,000 in a month, the entire employer’s contribution will be non-deductible for the employer’s income tax liability.
Expansion of Tax-Deductible Contributions for Non-Members
The Finance Bill 2024 also proposes an increase in the limit of tax-deductible contributions for individuals not affiliated with registered funds or public pension schemes. The limit is set to rise from Kshs. 20,000 per month to Kshs. 30,000 per month, aiming to incentivize non-members to save for retirement.
Similar to contributions made by employees to registered funds, tax-exempt contributions by individuals are subject to specific criteria, including the individual’s pensionable income and contributions to the National Social Security Fund.
Taxation of Registered Trust Schemes
A notable provision of the Finance Bill 2024 is the removal of the tax exemption for income generated by registered trust schemes. This amendment implies that the income of such schemes will be subject to a 30% tax rate if enacted. This change could have adverse effects on pension returns and may deter the growth of retirement schemes, contradicting the government’s policy of promoting retirement savings.
Expansion of Tax-Exempt Pension Income
In a positive development, the Finance Bill 2024 proposes to exempt from income tax pension benefits paid to individuals upon reaching the retirement age specified by their respective pension schemes. Additionally, this exemption extends to individuals retiring early due to ill health or withdrawing from the fund after 20 years of membership.
Conclusion
The Finance Bill 2024 introduces significant changes to the taxation and regulation of pension schemes in Kenya. While some provisions aim to encourage retirement savings through tax incentives, others, such as the taxation of registered trust schemes, may present challenges for the pension industry. It’s essential for stakeholders to closely monitor these developments and adapt their strategies accordingly to navigate the evolving landscape of pension regulations.
For more information on pensions and pension schemes or any other pension related concern or query, please reach to Simon Muinde at smuinde@gvalawfirm.com.
