Saving for retirement is one of the few things that lowers your tax today. Contributions to a registered pension scheme, and to NSSF, are deducted from your income before PAYE is calculated, up to a limit. That makes them a useful tool, especially if you are in the 30% band or above.

What is deductible

The deduction covers:

  • NSSF contributions, which are deducted automatically by your employer.
  • Contributions to a registered pension or provident fund, including your own contributions to an individual retirement benefits scheme.

The deduction is limited to the lowest of the amount you actually contributed, 30% of your pensionable pay, and a maximum of KES 30,000 a month (KES 360,000 a year) at the time of writing. Employer contributions to a registered scheme are not taxed as part of your pay up to a limit as well.

A worked example

You earn KES 150,000 a month. NSSF takes KES 6,480. You also pay KES 15,000 a month into a registered individual pension plan. Together that is KES 21,480, within the KES 30,000 limit, so your taxable pay falls by KES 21,480. At a marginal rate of 30%, your PAYE falls by about KES 6,444 a month, so the KES 15,000 you put in costs you about KES 8,556 after tax. The tax reliefs calculator shows the effect for your own figures.

Why it works best for higher earners

Relief is given at your marginal rate. At 10% a contribution saves 10 cents on the shilling, at 30% it saves 30 cents and at 35% it saves 35. If you are close to a band boundary, a contribution can also move income down into a lower band. See the bands in how PAYE is calculated.

How to claim

Through payroll, ask your employer to deduct your voluntary contribution from your salary and pay it to the scheme. If you contribute on your own, give your employer the scheme's certificate each year, or claim the deduction in your return on iTax with the certificate attached. Check your P9 to confirm what was allowed; see filing your employment return with a P9.

What happens when you take the money out

Tax is charged on a lump sum taken at retirement or early, with more favourable treatment at retirement age. The rules and the bands are detailed, so test your case in the pension lump sum tax calculator before you decide. Contributions are for the long term; do not rely on being able to withdraw them early without tax.

Things to check before you contribute

  1. Is the scheme registered with the Retirement Benefits Authority?
  2. What are the fees and the past returns?
  3. Can you change the amount, and what are the rules on withdrawal?
  4. Does your employer match contributions?

Employers

If you offer a pension scheme, record each employee's contributions and benefits. The benefits and allowances register tracks employer-paid benefits and the statutory remittance tracker lists each payroll deduction and when it is due. Understand NSSF itself in NSSF contributions explained.

Pension contributions sit alongside other deductions. See mortgage interest relief for homeowners and how to claim insurance relief on PAYE for the other two, and use the annual income tax estimator to see how they combine across a year. Employers can show the benefit on the payslip using the payslip generator workbook.

Limits and rules are revised by Finance Acts. Confirm the current figures with KRA and the Retirement Benefits Authority.