MODULE 2: PERSONAL INCOME TAXATION LUBINDA NAMILUKO MBA, BAcc, ACCA, CIA, CISA, AZICA Module 2: Personal Income Taxation 1
INTRODUCTION Individuals are classed as either employed or selfemployed individuals. A person s liability to income tax depends on their residence status The most common method of taxation will depend upon classification. The Pay As You Earn system is usually applied to most individuals in both of these categories. The approach adopted by the tax authorities in deciding whether one is an employee has been to perform a series of tests. A decision is made based on the weight of the results Module 2: Personal Income Taxation 2
Contract FOR and OF Service A contract for service differs from a contract of service. A contract of service is an agreement where one person agrees to employ another as an employee and the other agrees to serve his employer as an employee. Under a contract of service, the employer must contribute to pension fund and provide relevant statutory benefits such as annual leave, sick leave etc. for his employees. A contract for services, however, is an agreement where a person is engaged as an independent contractor, such as a self-employed person or vendor engaged for a fee to carry out an assignment or a project for the company. Under such a work arrangement, there is no employer-employee relationship. The differences between a contract FOR and a contract OF service: Module 2: Personal Income Taxation 3
Self-Employment Tests Control. Ownership of factors of production Economic considerations Unit of command Who decides on the recruitment and dismissal of employees? Who pays for the employees wages and in what ways? Who is responsible for providing insurance cover? Who determines the production process, timing and method of production? Who is responsible for the provision of work? Who provides the tools and equipment? Who provides the working place and materials? Does s/he carry on business on his own account or carry on the business for the employer? Is s/he involved in any prospect of profit or is he liable to any risk of loss? How are her/his earnings calculated and profits derived? Who bears the cost for errors/correction of work How many people does s/he report to at any particular time? Module 2: Personal Income Taxation 4
PAYE What is it.. This is a method of deducting tax from employees emoluments in proportion to what they earn. Under the system, the employer is empowered to: a) calculate tax payable by every employee b) deduct tax due from the emoluments, and c) remit tax deducted to ZRA The term emoluments means total earnings of an employee from employment. These include wages, salaries, overtime, leave pay, commissions, fees, bonuses, gratuities and any other payments from employment or office. (Section 2 of IT Act). An office is one that is capable of being vacant. It is distinguished from the occupant. Module 2: Personal Income Taxation 5
PAYE Computation Under the PAYE system, the amount of tax which the employer deducts from any pay depends on: a) The employee s total gross pay b) The applicable tax rates; and c) Statutory deductions (contributions to an allowable Pension Scheme, e.g. NAPSA) up to K255.00 or the actual 15% of the gross salary, whichever is lower. Module 2: Personal Income Taxation 6
Band Quantum % rate Band tax (K) Cumulative tax (K) 1 3 000 3 000 0 0 0 2015 tax bands 3 001 3 800 800 25 200 200 3 801 5 900 2 100 30 630 830 5 900 + 35 Module 2: Personal Income Taxation 7
PRACTICE QUESTION Joyce who works as an IT specialist earned a monthly pay of K12, 000.00 in January 2015. She also received K1,480 housing allowance, and overtime of K3,120. Joyce had deductions of K872 for a personal loan, K580 for Union subscription, and K792.05 NAPSA contribution. Required a) Calculate the tax payable by Joyce in January 2015 b) Calculate Joyce net pay for the month of January 2015 Module 2: Personal Income Taxation 8
a) Joyce PAYE computation for January 2015 Module 2: Personal Income Taxation 9
b) Joyce Net pay computation for January 2015 Module 2: Personal Income Taxation 10
Tax refunds A tax refund may arise in the following situations: a) Errors: Pay-roll errors, for example; - use of wrong tax bands and rates - arithmetical errors in calculating tax - complete or partial omission of statutory deductions b) Unemployment Repayments: If employment ceased at any time, but before the end of the charge year, unemployment repayment may arise due to incorrect use or non-use of tax tables. This repayment is part of the tax that you may have paid during the tax year in which the employment is terminated. Module 2: Personal Income Taxation 11
All cash benefits paid in the form of allowances such as education, housing, transport, utility and settling etc are taxable. Taxation of Cash benefits and Fringe benefits Where an employer discharges the liability of an employee by paying his/her rent, electricity, telephone, water bills, school fees or professional association fees, club membership fees and similar payments, the employer is required to add such payments to the employees emoluments and deduct tax under PAYE. Module 2: Personal Income Taxation 12
The following benefits are not subjected to PAYE: olabour day Awards oex-gratia payments Exemptions omedical expenses ofuneral expenses ositting allowances for councilors obenefits that cannot be converted into cash such as free residential housing provided by the employer, canteen expenses and personal to holder cars. Module 2: Personal Income Taxation 13