The National Treasury has proposed raising the tax levied on employers for welfare benefits to workers by more than three-fold to 30 percent.
The Treasury wants the levy known as the fringe benefit tax (FBT) to be matched to the prevailing rate of corporate tax at 30 percent, a departure from the current varying rate set by the Kenya Revenue Authority (KRA) quarterly and based on other market rates.
Currently, the fringe benefits tax sits at nine percent.
“The rate of tax on fringe benefits provided by an employer shall be the resident corporate rate of tax for that year of income,” reads Finance Bill 2025.
The FBT is imposed on employees receiving extra welfare benefits such as cheap loans in addition to their wages.
Taxable employment income in Kenya includes all payments made by an employer to an employee. This will include salaries, wages, bonuses, and fringe benefits received or enjoyed during employment.
According to KRA, the taxable value of fringe benefit tax is the difference between the market interest rate and the actual interest paid on the loan.
If person A is granted a car loan of Sh2 million by their employer at an interest rate of three percent, the fringe benefit would now total to 27 percent representing the difference between the corporate tax rate and the interest rate.
This would translate to an absolute fringe benefit of Sh540,000 or Sh45,000 per month. The fringe payable by an employer under current computations would be 30 percent of the fringe benefit or Sh13,500 per month.
The higher charge on fringe benefits could impact on the ability of employers to support employee welfare programmes, leading to a reduction or even elimination of loans offered by employers to workers.
Currently, the fringe benefits tax sits at nine percent, a two-year low attributable to lower market interest rates anchored on recent benchmark rate cuts by the Central Bank of Kenya.
The prevailing fringe benefits tax rate is set to run until June 2025 but could be bumped up considerably by over three-fold if members of parliament approve proposals by the Treasury.
Fringe benefit tax is provided under section 12B of the Income Tax Act which became effective on June 12, 1988, with respect to loans provided to an employee, director, or their relatives at an interest rate lower than the market interest rate.
Failure to remit the tax attracts a penalty of 25 percent of the tax due while late payment attracts a penalty of five percent of the tax due.
