A package that includes a car, a house or a driver feels like a large gain, and it is. It is also taxable. The tax is not on what the employer spends but on a value set by the Income Tax Act, which is added to your taxable pay each month. Understanding the formulas helps you negotiate fairly and avoid surprises on your payslip.

Company car benefit

When an employer provides a vehicle for the employee's private use, the employee is taxed on the higher of two amounts each month:

  1. A percentage of the car's cost: 2% of the cost of the vehicle a month, or
  2. A fixed monthly amount set by KRA according to the engine size, which ranges from a few thousand shillings for a small engine to a higher amount for a large one.

If the employee contributes towards the car, the contribution reduces the benefit. A car that the employer hires for the employee is taxed at the hire cost. A pool car used only for business, with no private use or take-home, gives no benefit. Fuel, a driver and insurance paid for private use are further benefits. Run the numbers with the taxable benefits calculator.

Housing benefit

When the employer provides free or subsidised housing, the benefit depends on who the employee is:

  • Ordinary employees are taxed on the higher of the fair market rent, the rent the employer pays, or 15% of total income.
  • Directors and whole-time service directors are taxed at 15% of their total income.
  • Agricultural employees living on the farm are taxed on a lower rate of 10% of total income.

The employee reduces the benefit by any rent they pay the employer. The total of the benefit counts as part of gross pay for PAYE, NSSF and the housing levy, so a free house can raise your statutory deductions.

Other common benefits

Free meals above a monthly limit, school fees paid by the employer, a loan at a low rate, domestic servants and club memberships are also taxable. Not everything is: a per diem for travel is exempt up to a daily limit, and staff meals in a canteen are exempt up to a monthly limit. See taxable allowances and company benefits for the full list and employer loans and salary advances for loans.

A worked example

An employee earns KES 200,000 in cash. The employer gives a car that cost KES 3,000,000 with a private-use allowance. At the percentage in the rates table, 2% of KES 3,000,000 is KES 60,000 a month, which is higher than the engine-size amount, so KES 60,000 is added. The employee is also given a house valued at 15% of total income. Total taxable pay becomes well above KES 200,000, and PAYE rises accordingly. Enter these inputs in the PAYE calculator after valuing the benefits. Seeing the combined effect before you accept the job helps you compare offers fairly.

Negotiating a package

Benefits can be efficient or expensive depending on the numbers. Ask three questions:

  1. What is the taxable value? A benefit valued at KES 60,000 a month costs the employee about 30% of that in PAYE if they are in the top band.
  2. Could cash do better? Compare with the net to gross salary calculator. Sometimes a higher salary and your own car cost less in tax.
  3. Is it reliable? A car is lost if you leave, while cash is yours.

For employers, a vehicle with strictly business use, documented by a logbook, avoids the benefit. A fleet fuel and maintenance tracker shows the business use and the cost. Record all benefits on the benefits and allowances register so payroll applies the same values every month.

Who pays the tax?

The tax on a benefit is PAYE, paid by the employer through payroll and deducted from the employee's cash pay. Where the cash is small, the benefit can leave very little take-home pay, so check that the package works month to month. If an employer undervalues a benefit, KRA can assess the shortfall at audit, with penalties and interest, as described in KRA penalties and interest.

Frequently asked questions

Is a pool car a taxable benefit? A car used only for business, kept at the office and not taken home, normally gives no benefit. A logbook helps prove this.

Who bears the tax on a benefit? The employer deducts PAYE from the employee's pay, so the employee bears the tax even though the benefit is not cash.

Does fuel paid by the employer add to the benefit? Fuel for private use is a separate benefit valued at its cost, in addition to the car benefit.

Can I reduce the housing benefit? Yes, by paying rent to the employer. Any rent you pay reduces the value taxed.