How SHIF and other recent pay deductions have eaten into your earnings

Kenyans are staring at another assault on their income as the higher charges for the new state-backed health insurance kick in this month.

Kenyans in formal employment will pay 2.75 per cent of their gross salary to the Social Health Insurance Fund (SHIF). 

This will be a steep increase for many and even steeper for high-income earners, who will see their contribution go up by as much as 1,000 per cent when compared to the National Health Insurance Fund (NHIF) which applied a flat rate of Sh1,700 for most.

Also hard hit are self-employed Kenyans, who will also have to contribute 2.75 per cent of annual gross income subject to a minimum of Sh300 per month.

The higher SHIF deductions are the latest in what has been a series of raids for the payslips of Kenyans. In the last one year, the housing levy has come into effect, contributions to the National Social Security Fund (NSSF) increased from Sh350 to Sh2,160 a month and high income earners hit with an increase in Pay as You Earn (Paye) tax rates.

The new deductions have resulted in what is now becoming a significant reduction in what formal sector employees take home at the end of the month. 

This reduction in earnings has been aggravated by higher taxes on essentials and loss of jobs, increasing dependency on employed family members. 

Payslip simulations show that the ‘health tax’ for formally employed Kenyans earning over Sh20,000 will go up to Sh1,375 under SHIF from Sh1,200 per month they have been paying for NHIF.

This will mean most Kenyans will be hit by higher deductions under SHIF, considering that the average monthly income for Kenyans stood at Sh24,000 last year, according to data by the Kenya National Bureau of Statistics (KNBS).

Kenyans earning under Sh20,000 will however see slight relief and will pay Sh550 under SHIF compared to Sh750 they have been paying under NHIF.

SHIF deductions will be particularly painful for high income earners, whose contributions will go up by as much as 1,500 per cent for those earning between Sh500,001 and Sh1 million per month, who will pay Sh27,500 per month under SHIF from Sh1,700 under NHIF.

“Under SHIF, employees, especially those in higher income brackets, will face increased contributions, reducing their disposable income. While the government may offer subsidies to low-income earners, middle- and high-income earners will feel the pinch,” said Andrew Mlawasi, an accounting and finance professional and tax analyst in analysing the new system.

He also noted that the requirement for all Kenyans to register for SHIF and make payments would be a strain for many households.

“The mandatory nature of SHIF contributions, especially for informal sector workers who previously had the option of voluntary contributions under NHIF, places an additional financial burden on households that are already struggling with the high cost of living,” he said.

Mlawasi also noted that the implementation of the new system could in its early days be marked by hiccups on account of insufficient stakeholder engagement and distrust among Kenyans owing to poor communication as well as historical experiences with NHIF.

He however added that  if well managed, Kenyans could potentially benefit from better healthcare services, reduced out-of-pocket medical expenses, and improved health outcomes.

Until 2021, employees and their employers paid a combined Sh700 per month to NHIF, or Sh350 per month each.

Sharing the sentiments that the new healthcare system will increase taxation burden on Kenyans who are struggling with the high cost of living is the Council of Governors (COG).

For several months now COG has come out strongly to oppose the new healthcare scheme for lack of adequate transparency and its impact on poor households.

“This Bill fails to legislate on principles such as acceptability, affordability, accessibility, equity, transparency, accountability, efficiency and sustainability that underscores it,” stated the CoG in a memorandum to the Social Health Insurance Fund Bill. “These principles are vital for establishing the foundation of the law and institutional framework.” 

The 2.75 per cent contribution to SHIF is the latest assault on the earnings of Kenyans, which has in the recent past seen higher taxes and levies erode their take home pay. In the last year alone, they have  such as the new Housing Levy Fund and the increase in the National Social Security Fund (NSSF) rates.

Last year, the state hiked the rates for the NSSF, whose costs are also shared between the employee and employer. NSSF rates went up to Sh1,080 up from a previous Sh200.

The Finance Act 2023 introduced the Affordable Housing Levy Fund, which emerged as among the most disputed clauses in any Finance Act, in which employees pay 1.5 per cent of their gross pay that is then matched by the employers, also at 1.5 per cent.

The act also pushed up taxes for high-income earners who were hit by higher Pay as You Earn (PAYE) at 35 per cent for those earning upwards of Sh800,000 per month from 30 per cent.

Those earning between Sh500,000 and Sh800,000 are being taxed at 32.5 per cent.

 This year, this has doubled to Sh2,160 per month.

Other than the direct deductions on employee pay that reduces their disposable income, the government has introduced a host of taxes on essential products that have further pushed up the cost of living.

These include the doubling of the Value Added Tax (VAT) on petroleum products, which was increased by the Finance Act 2023, which forced many Kenyans to rethink their mode of commuting to work while increasing operating costs for companies and pushing up the cost of essentials.

The higher taxes have however not eased the situation for the government that is unable to meet revenue targets. 

During his exit interview, former Treasury Cabinet Secretary Njuguna Ndung'u drew a picture of the dilemma that is currently facing the government in meeting debt obligations in the face of contracting revenues.  

According to Prof Ndungu, the Covid-19 pandemic and its aftershocks have eroded the spending capacity of many households and businesses and thus introducing new taxes will not help.

“The cost of living and high taxation debates are just symptoms of two facts in the country,” he said.

“Poverty and inequality after many layers of negative shocks have persisted. What we are hearing is not the cost of living or high taxation but it is actually poverty that has hit the country so hard.”

“We need to run away from this notion that high taxes will raise high revenue. In fact the opposite applies,” he explained. “High taxes cannot bring you high revenue so we need to study how we optimise each tax instrument.”  

The higher taxes and other deductions that have been chipping away at how much Kenyans take home  are in addition to other deductions such as the servicing of loans taken from commercial banks and Saccos.

Tough economic times have forced Kenyans to increasingly borrow, with much of the funds borrowed going to sustenance including paying for rent, fees and even food, meaning thinner payslips as they service the loans.

A February report by Old Mutual showed that 38 per cent of people who took part in a survey were borrowing for everyday expenses. Another 33 per cent were borrowing for an unexpected emergency.

It also showed that 11 per cent of the respondents in the survey were borrowing to repay a loan, while another six per cent were borrowing to lend money.

“Almost half (48 per cent) of working Kenyans are financially stressed. An overwhelming nine in 10 Kenyan consumers are earning less than or the same as they did prior to Covid.

"This means that the majority of these consumers currently have less money in their pockets than they did prior to being impacted by the pandemic,” said the Old Mutual Financial Monitor.

Despite the impact that the new contributions will have on kenyans ability to spend as well as seemingly insurmountable challenges that the new system has faced in its first week of implementation, the government says it will push ahead with full implementation.

The government says SHIF is meant to create fairness and equity in healthcare access regardless of income levels but also offers expanded benefits compared to NHIF.

“We looked at this in terms of equity; are all Kenyans contributing. We looked at the average contribution of all Kenyans and if all Kenyans contribute 2.75 per cent of their income, then there will be equity and we will be able to support each other in delivering the social health insurance system of the country,” said Health Services Principal Secretary Harry Kimtai in a media interview last week.

Kimtai said SHIF provides all Kenyans the same cover for 2.75 per cent of their income with benefits that some did not enjoy under NHIF.

“Under NHIF there are those who were getting enhanced schemes for those who are paying more,” explained Kimtai.

“This time every Kenyan who has paid 2.75 per cent will be entitled to an equal benefit package without differentiation.”