What is Installment Tax?
Installment tax is estimated income tax paid periodically to KRA in anticipation of the tax payable for a year of income. It is a way of paying income tax in advance as the Income Tax Act requires. This targets taxpayers who are not employees, and it can be equated to income tax paid in advance through PAYE. Installment tax is paid in four equal installments before the year of income ends and before the business accounts are prepared to establish the actual tax payable.
This tax is payable by taxpayers who project their annual tax liability to exceed Ksh. 40,000 in the year of income.
Who is obligated to pay installment tax?
- Sole proprietors, including
- Independent
- Contractors
- Professionals
- Consultants etc.
- Entities
- Companies
- Saccos
- Clubs etc.
- Limited Partnerships
Exemptions from instalment Tax
- Employees under the PAYE
- Taxpayers subject to other income tax regimes that are final eg. Monthly Rental Income and Income under turnover tax (TOT)
- Exempted taxpayers eg. Charitable organizations
How to calculate installment tax
- Project the tax payable at the beginning of the financial year. This should be the lower of:
- Prior year basis – Prior year tax payments are multiplied by one hundred and ten percent (110%), or
- Current Year basis – In this method, especially for new businesses or those in losses and turned to profitability, installment tax is determined by estimating the current year’s profit and tax payable thereon.NB. While projecting the annual tax liability, the expected withholding tax for the year is netted off in arriving at the net estimated tax liability to use in determining installment taxes payable. Spread the installments evenly at 25% of the tax due and payable on the 20th day of the 4th, 6th, 9th, and 12th months of the year of income.
- Taxpayers in the Agricultural Sector are allowed to pay in installments of 75% in the 9th month and 25% in the 12th month. Note that the tax balance (The difference between the installment tax paid and the actual tax liability for the year of income) is payable by the end of the 4th month after the year-end. For example, for a company whose financial year ends on 31st December, the tax balance is payable by the 30th April of the following year. If the installment tax paid exceeds the actual tax payable after finalizing the accounts for a year, the taxpayer can apply the excess amount as an advance payment for the following year.
How to pay installment tax
Installment tax in Kenya is paid via the iTax platform where a taxpayer generates a payment slip and presents it together with the cheque drawn in favour of Kenya Revenue Authority, at any of the partner banks.
Penalty for late filing
The Tax Procedures Act 2015 (Revised 2021) provides that where a taxpayer submits a tax return after the due date, they shall be liable to a penalty of;
- 5% of the amount of tax payable under the return or Ksh. 20,000 whichever is the higher, in respect of a person other than an individual; or
- 5% of the amount of tax payable under the return or Ksh. 2,000 whichever is the higher, for an individual.
Penalty for late payment
- 5% on the tax due.
- The penalty for underpaying installment tax is 20% of the difference between the amount
Disclaimer: This Instalment Tax article is written in general terms for guidance only and is not a substitute for professional advice or the Law. Whilst every care has been exercised in ensuring the accuracy of the information contained herein, we will not accept any responsibility for errors or omissions or any action taken or refrain from taking action without appropriate professional advice.