Finance Bill 2024 amendments on tax will increase retirement savings

The introduction of amendments in the Finance Bill 2024 aimed at enhancing retirement savings for citizens are a good move.

The Finance Bill 2024, currently undergoing public participation, proposes to increase the limit of tax-deductible contributions made by employees to registered pension schemes and provident funds from Sh20,000 per month to Sh30,000. This is a welcome change as it adjusts upwards the tax-free contribution limits that have remained unchanged since 2005.

It is our view that this is an overdue amendment that recognises the fact that the limits set 19 years ago need to be adjusted for inflation and to reflect the fact that incomes have also changed over the past two decades. We also note that this proposal aligns with the government’s policy of encouraging Kenyans to increase their retirement savings.

This proposal will likely lead to an increase in pension contributions as employees take advantage of the increased tax-free pension contribution amounts.

Additionally, a similar increase in the limit of tax-deductible contributions will apply in the case of persons who are not members of a registered fund or a public pension, where such contributions by an employer are made on the employee’s behalf to the National Social Security Fund.  As mentioned above, this is a welcome change that seeks to ensure that individuals who are self-employed or who are not members of a registered pension scheme also enjoy the enhanced limits as they contribute to individual retirement funds.

The Finance Bill also proposes to repeal the relief which is available when an individual pays premium for a medical insurance policy or towards the National Health Insurance Fund, or towards a post-retirement medical fund. The relief is currently set at 15 per cent of the amount of premiums paid but subject to a limit of Sh60,000.

The Bill proposes to repeal the affordable housing relief applicable to a person saving for the purchase of a house under an approved affordable housing scheme. The relief is currently set at 15 per cent of the employee’s contribution but not exceeding Sh108,000 per year.

It is noteworthy that this relief is different from the relief available for deductions pursuant to the Affordable Housing Levy Act. We see this as a clean-up of the reliefs that were available on contributions as the Bill now proposes to fully allow the contributions for tax purposes.

The Finance Bill 2024 proposes to tax the interest income earned by resident persons from all listed bonds, notes, and other similar securities used to raise funds for infrastructure and other social services - commonly referred to as infrastructure bonds. Accordingly, a five per cent withholding tax shall be applicable on the payment of such interest to resident persons.

However, the interest earned from infrastructure bonds listed prior to this proposal’s coming into force shall continue to be exempt from tax. In addition, no withholding tax shall apply on such interest paid to non-resident persons.

Infrastructure bonds and bonds in general have become quite popular with retail investors in the past with reports indicating that retail investors have overtaken traditional holders of government bonds such as insurers. Accordingly, this proposal can be seen as an attempt by the government to subject to interest income paid to resident retail investors and increase the tax base.

It remains to be seen what the effect of the imposition of the reduced five per cent withholding tax as opposed to the 15 per cent applicable on normal bonds will have on the uptake of infrastructure bonds by retail investors.

Moreover, the bill proposes to exempt from income tax the payment of pension benefits to a person upon attainment of the retirement age determined by the rules of their respective registered retirement scheme. The exemption shall also apply where a person retires early prior to attaining the retirement age due to ill health or withdraws from the fund after 20 years from the date of registration as a member of the fund.

This proposal will encourage saving for retirement through a registered scheme and prevent early withdrawals due to the conditions for the exemption such as the requirement for withdrawal after 20 years from the date of registration as a member of the fund.

This exemption is a crucial step in ensuring that retirees can fully enjoy the benefits of their lifelong savings without the additional concern of tax liabilities. By doing so, the government is encouraging a culture of saving for retirement and reducing the temptation for early withdrawals, which often undermine long-term financial stability.

The bill also amends the requirement for pension funds, provident funds and individual retirement funds to seek separate registration with the Kenya Revenue Authority for tax exemptions after registration with the Retirement Benefits Authority. In the past, this process consumed a lot of time and if the new law is implemented, such funds will be exempted by default being registered with the RBA.

The writer is CEO, Enwealth Financial Services