All The Taxes You Pay In A Day If You Earn Ksh80k

They say that in life, there are three certainties one cannot escape: change, death, and taxes. While the inevitability of change and the certainty of mortality are profound aspects of the human experience, taxes, too, play a pivotal role in shaping your daily lives. This is because you pay taxes on what you earn, what you buy, and sometimes, what you own. 

Taxes have been a staple of governance around the world for millenniums. Archaeology confirms that Egypt employed one of the first known tax systems over 5000 years ago. Egyptian pharaohs hired tax collectors to impose levies on various goods and produce, such as grains and cooking oil. 

The tax that was collected provided revenue primarily to fund government activities. Today, tax is a mandatory payment or charge collected by the national government through the Kenya Revenue Authority (KRA) from individuals or businesses to cover the costs of general government activities from building roads to paying teachers. 

Taxes are a central part of the financial transactions you make daily. But do you know just how much taxes you pay every day?

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Type of Taxes You Pay

The largest and most recognized tax is the individual income tax. But it is not the only type of tax you pay. In fact, KRA lists tens of different types of taxes on its website, which are typically levied in two ways: directly or indirectly.

Direct Tax: This tax is levied on an individual’s or organization’s income or asset and is calculated based on their ability to pay. Examples include individual income taxes, taxes on cash prizes, returns on investment, land rates, and capital gain tax on property. 

Indirect Tax: This tax is levied on goods and services you buy and is collected by the retailer or manufacturer. Indirect tax is typically added as a percentage to the price you pay and is the same for everyone. The most prominent indirect tax is value-added tax (VAT) which you pay when buying anything from milk to fuel. 

Now that you understand taxes are a part of daily life, whether you pay them directly or indirectly, how much do you think you pay per day, assuming you earn a gross of Ksh80,000 per month?

Let's break it down. 

1. Individual Income tax 

This tax is levied on your gross income and is deducted at the source before you receive your salary as PAYE. The PAYE  system ensures that individuals pay their income tax obligations on a regular basis throughout the year rather than in a lump sum at the end.

Now, let's break down how PAYE works in the context of a monthly gross income of Ksh80,000:

Gross Income: Ksh80,000 per month

Taxable Income: Certain deductions and exemptions are applied to arrive at the taxable income. This includes items like NSSF pension contributions (Ksh1,080), Housing Levy (Ksh1,200), and NHIF insurance contributions (Ksh1,500). You will also receive Insurance (NHIF) Relief and personal relief (Ksh2,400).

PAYE Calculation: The PAYE calculation will consider all the deductions and reliefs to calculate your taxable income. Thereafter, you will be taxed depending income band. 

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Results: (Payslip for July 2023)

From the calculation above, your income tax liability will be Ksh15,835, and your net pay will be Ksh60,385. 

Now, to find out the daily PAYE, you can divide the monthly PAYE by the number of days in a month (30). 

Daily PAYE: 15,835/30 = 528

Therefore, based on those calculations, you would be paying approximately Ksh528 in PAYE per day from a gross monthly income of Ksh80,000 in Kenya. 

2. Tax on Every Day Expenses 

Now that we have determined your net income after PAYE is Ksh60,385, you will need to create a budget to spend this money. 

For illustrations, we will use the 70/20/10 budgeting rule that allocates your net pay into three categories: 70% for needs, 20% for savings, and 10% for wants. 

Here's how you can break down a net pay of Ksh60,385 according to the 70/20/10 budget:

Needs (70%):

This category includes essential expenses you cannot easily cut, such as rent or mortgage, utilities, transport, and groceries. 

70% of Ksh60,385 = Ksh42,269.5

Now, let's break down this expenditure:

1. Rent - Ksh17,000 - Landlords are required to pay a 7.5% income tax which they typically pass to the tenant. Of the Ksh17,000 you pay as rent, the landlord will keep Ksh15,725 and remit Ksh1,275 to KRA. 

2. Groceries - Ksh9,000 - Food items are subject to 16% VAT, meaning of the Ksh9,000 you spend on groceries, Ksh1,440 was taxes.

3. Electricity - Ksh1,200 - Multiple taxes and levies are levied on every shilling you spend to buy tokens. Approximately Ksh500 will be taxes. 

4. Water - Ksh1,000

5. Calls, SMS, and Internet Bundles - Ksh3,200 - Airtime purchases include a 15% excise duty. This means of the Ksh3,200 you spend, Ksh480 will go to the government. 

6. Transport (Fuel) - Ksh10,870 - In November 2023, a litre of petrol cost Ksh217.36 of which Ksh80.57 were indirect taxes and levies. Ksh10,870 will buy you 50 litres. However, Ksh4,029 will be taxes and levies. (50 litres x Ksh80.57)

Wants (10%):

This category includes non-essential expenses, such as dining out, entertainment, hobbies, and other discretionary spending.

30% of Ksh60,385 = Ksh6,038.5

Most of this expenditure (eating out, buying new clothes, etc.) will be subject to VAT tax. Of the Ksh6,038.5 you spend on wants, Ksh966 will be taxes. 

Savings and Debt Repayment (10%):

This category is for building savings, emergency funds, and paying down debts.

20% of Ksh60,385 = Ksh12,077.00

This money will likely not be taxed until you withdraw it and spend. So for instance, if you run into an emergency and withdraw Ksh3,000 to replace your lost charger or fix your computer, you will pay 16% VAT on that expence which will Ksh480

Now let's total all those indirect taxes. 

From the calculation above, you will be spending Ksh9,170 paying indirect taxes. This works out to approximately Ksh305 per day. 

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Total Taxes You Pay Daily if You Earn Ksh80,000 Monthly Salary

In this scenario above, we've established that your PAYE contribution would amount to Ksh15,835. This is the direct deduction from your monthly salary mandated by the government.

Additionally, your monthly expenditure plays a significant role in indirect taxes, which encompass various levies on goods and services. The cumulative impact of these indirect taxes on your expenditures tallies up to Ksh9,170. These include value-added taxes (VAT) on goods and services, excise duties, and other indirect levies embedded in the prices of the products and services you consume.

Now, to determine your total monthly tax liability, you sum up the direct and indirect tax figures:

Total Tax = PAYE + Indirect Taxes

Total Tax = Ksh15,835 + Ksh9,170

Total Tax = Ksh25,005

Therefore, your total tax liability on a monthly salary of Ksh80,000 amounts to Ksh25,005. 

To calculate your daily tax burden, you can divide this figure by the number of days in a month (assuming a standard 30-day month):

Daily Tax Liability = Total Tax / 30

Daily Tax Liability = Ksh25,005 / 30

Daily Tax Liability ≈ Ksh833.50

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WRAPPING UP

It's crucial to recognize that the scenario presented here is just one example, and your actual tax burden can vary based on various factors. Individuals with additional considerations, such as life insurance or mortgage payments, may qualify for tax relief through deductibles that can reduce their PAYE obligations. Understanding and leveraging these options can significantly impact your overall tax liability.

Your indirect taxes are intricately linked to your spending habits. If you allocate a larger portion of your income to savings rather than expenses, your indirect taxes may decrease accordingly. For instance, saving 10% instead of 20% could result in higher expenditures and, consequently, higher indirect taxes. 

Finally, remember that while taxes may seem burdensome, they're inescapable. Failure to fulfill your tax obligations can amount to committing a tax offence, which can have serious consequences, including fines or legal repercussions.