Taxing Retirement Benefits in Kenya: How Tax Laws (Amendment) Act 2024 puts more money in your pocket

Taxing retirement benefits in Kenya: A Detailed Analysis of The Tax Laws (Amendment) Act 2024 and how they Benefit the Retirement Benefits Sector

The recent passage of the Tax Laws (Amendment) Act 2024  has heralded significant reforms aimed at improving the retirement benefits sector.

These amendments, whose commencement date was December 27, 2024,  reflect the government’s proactive approach to aligning tax legislation with the current economic realities of Kenyans while addressing long-standing challenges that have hindered the growth and efficiency of the retirement benefits sector.

This ensures that saving for the future becomes less of a burden and more of an opportunity for prosperity. At its heart, it recognizes that a well-planned retirement is not a luxury but a necessity. After all, retirement isn’t just about stopping work; it’s about making sure your money doesn’t retire before you do.

This analysis unpacks the transformative provisions within the Act, offering a comprehensive look at how they aim to empower savers, secure retirees, and bolster the sector’s sustainability.

Taxing Retirement Benefits in Kenya: Tax-Free Pension Contributions rise by 50%

The  amendment increases the tax-deductible contribution limit from KES 240,000—or KES 20,000 per month to KES 360,000 annually, equivalent to KES 30,000 per month providing significant relief for both individual savers and employers contributing to registered pension or provident funds.

This amendment recognizes the challenges posed by  inflation and increased cost of living. These amounts had not been reviewed for over a decade, implying that over time, the inflationary pressure eroded the intended benefit to contributing members.

By increasing the tax-deductible limit by 50 percent (KES 20,000 to KES 30,000 per month), the government aims to:

● Enhance disposable income: Individuals can now save more for retirement without their disposable income being significantly affected.

● Reduction in taxable income: By allowing higher deductions, the B ammendment ensures that more income remains untaxed, leading to lower Pay-As-You-Earn (PAYE) liabilities for employees.

● Promote retirement savings culture: The prospect of higher untaxed contributions incentivizes individuals to prioritize long-term savings through registered schemes.

● Address inflationary pressure: The adjustment helps align tax policy with current economic conditions, ensuring pension savings maintain their value over time.

Taxing Retirement Benefits in Kenya: Deduction of Post-Retirement Medical Funds from Taxable Income

Health costs remain a primary concern for retirees. Recognizing this, the Tax Laws (Amendment)Act 2024 introduces provisions that allow contributions to post-retirement medical funds—up to KES 15,000 per month—to be tax-deductible.

Also read: The Tax Laws (Amendment) Act 2024: A Detailed Analysis of the Amendments Benefiting the Retirement Benefits Sector

Also read: RBA CEO Charles Machira on Pension Funds Investment

This amendment aligns with the ongoing reforms in the retirement benefits sector and the implementation of the National Retirement Benefits Policy which encourages members to voluntarily save for their health through the post-retirement medical sub-funds permitted within retirement benefits schemes.

  This will have transformative impacts, including:

● Relieving healthcare burdens: Encouraging saving for healthcare ensures retirees have access to quality medical care without financial strain.

● Immediate tax benefits: Contributors experience reduced PAYE liabilities, leading to increased net salaries.

● Long-term planning: These funds provide a sustainable solution for post-retirement healthcare, addressing one of the most pressing retirement needs.

By weaving healthcare into retirement savings policies, the amendment reflects a holistic approach to addressing retirees’ well-being.

Taxing Retirement Benefits in Kenya: Tax Exemption for Pension Benefits

• Income derived from registered retirement benefits schemes will now be exempt from tax for individuals who:
• Have attained the retirement age as defined by respective retirement schemes, or
• withdraw accrued retirement benefits before attaining retirement age due to ill health, or
• Withdrawal from a registered scheme after a minimum of 20 years of membership.

The implications of this exemption are profound:

• Encouraging long-term savings: The condition requiring a 20-year membership before accessing tax-exempt benefits discourages premature withdrawals, ensuring sustained retirement funds growth.
• Safeguarding against uncertainty: The inclusion of early withdrawals for ill health provides a safety net for individuals facing unforeseen medical challenges.
• Enhanced financial freedom in retirement: Retirees can enjoy their benefits without the burden of income tax deductions, promoting financial security during their non-working years.

This amendment shifts the perception of retirement savings from being untouchable capital reserved solely for post-employment sustenance to a flexible resource that can address diverse needs while safeguarding future stability.

Streamlining the Registration of Retirement Funds

A subtle yet impactful amendment involves revising the definition of individual retirement funds, pension funds, and provident funds. Previously, such funds were required to be registered with the Kenya Revenue Authority (KRA). The Act now streamlines this process, mandating registration only with the Retirement Benefits Authority (RBA).

 This change aims to:

● Streamline regulatory oversight: Since RBA is the primary regulator of retirement schemes in Kenya, centralizing registration under its purview simplifies processes.

● Reduce bureaucratic delays: Eliminating dual registration requirement ensures schemes operate more efficiently.

This amendment reflects the government’s commitment to refining operational frameworks within the retirement benefits sector, reinforcing accountability and trust.

Conclusion

The Tax Laws (Amendment) Act 2024 reflects Kenya’s commitment to fostering a resilient retirement benefits ecosystem. The amendment addresses both immediate and long-term needs. It benefits those who continue to save for their retirement by making periodic contributions and also retirees, who will access their pension dues tax free.

In retirement, they say time slows down—but with these reforms, the possibilities have only sped up. The government has made it clear that when Kenyans retire, their worries won’t retire with them. Instead, they’ll enjoy freedom, stability, and the satisfaction of well-laid plans. If retirement is the world’s longest vacation, these reforms have undoubtedly made the journey more fulfilling and enjoyable.