Fringe benefit tax on low-interest staff loans
When a Kenyan employer owes fringe benefit tax on a cheap staff loan, how KRA measures the benefit, its worked example, and running loans through payroll.
By Achekam · · 4 min read · For Running a business businesses in Kenya
Lending money to staff is one of the kinder things an employer can do. School fees fall due, a parent needs hospital care, a motorbike breaks down. A loan from the business, repaid through payroll at little or no interest, can make a real difference to someone's month.
It also creates a tax cost that many employers do not see coming. In Kenya, a loan at a below-market rate is treated as a benefit to the employee, and the tax on it falls on the employer, not the employee. This article explains when that happens, how KRA measures it, and how to set up staff loans so the cost is known in advance.
Loans below the prescribed rate
KRA's position is that an employer lending to an employee at interest below the prescribed rate has to file and pay fringe benefit tax. It is the employer's tax, not something deducted from the employee's pay.
The trigger is the interest rate. A loan at a commercial rate creates no benefit. A loan at a low rate, or interest-free, does. Salary advances can look similar from the outside. Keep the written terms of every advance and loan, so it is always clear what was agreed and at what rate.
Measuring the benefit
KRA measures the benefit as the difference between the market interest rate and the interest the employer actually charges, applied to the loan. In other words, the employee is treated as receiving the interest they did not have to pay.
That makes the cost predictable. Once you know the loan balance, the rate you charge and the market rate KRA uses, you can work out the monthly benefit before you sign the loan agreement.
The rate of fringe benefit tax
The Income Tax Act, as published on Kenya Law, says tax on fringe benefits provided by an employer is charged at the resident corporate rate for that year of income. The Act sets that corporate rate at Sh. 6.00 in each twenty shillings, which is 30%, for the year of income 2021 and later years. Check the current rate at the time you calculate.
KRA's frequently asked questions about PAYE explain fringe benefit tax on low-interest loans, with the worked example used below.
KRA's worked example
KRA illustrates the calculation with one loan:
- The employer lends KShs 3,000,000 to an employee at 3%.
- The market interest rate is 9%.
- The benefit, the interest the employee is spared, comes to KShs 15,000 a month.
- Fringe benefit tax is that KShs 15,000 at 30%, which is KShs 4,500 for the month.
- The employer pays it.
Two things stand out. First, the tax is monthly, for as long as the cheap loan is outstanding. Second, the larger the loan and the wider the gap between the market rate and your rate, the larger the benefit and the tax. A small, short loan at a modest discount costs little; a large, long, interest-free loan costs a great deal more over its life.
Recording staff loans and recoveries in Achekam payroll
In Achekam, salary advances and staff loans are recorded and recovered from each pay run until they are repaid. The repayment schedule is part of payroll, not a separate spreadsheet that someone has to remember.
Each approved pay run is posted to the business's own ledger as a wages journal, with the amounts owed to the tax authority and funds shown as liabilities. The loan recoveries therefore reduce the staff loan balance in the books as each run is approved.
Fringe benefit tax needs its own step. Kenyan payroll in Achekam calculates PAYE with personal and insurance relief, NSSF Tier I and II, SHIF, the Affordable Housing Levy and the NITA levy. Fringe benefit tax is not on that list. Work it out from the loan balances each month and post it with a manual journal, debiting an expense and crediting a liability account for fringe benefit tax. A journal that does not balance, or that falls in a closed month, is refused, and a posted journal is corrected only by a reversal, so the history of the tax stays clear.
Policy choices for employers
A short written staff loan policy avoids most surprises. It should settle:
- The interest rate. Charging at or near the market rate avoids the benefit; charging less is a choice to bear fringe benefit tax.
- Who bears the cost. The tax is the employer's. Decide whether to absorb it or reflect it in the loan terms, and tell staff.
- Maximum amounts and terms. Long, large, cheap loans carry the largest tax cost.
- Repayment through payroll. The Employment Act limits total deductions from an employee's wages at any one time to two thirds of the wages, so set instalments that stay well inside that limit alongside the employee's other deductions. See the limit on wage deductions.
- What happens if the employee leaves. Agree in writing how any balance is settled.
- Approval. Name who can approve a loan, and keep the signed agreement on file.
Fringe benefit tax is one part of the wider picture of non-cash pay; PAYE on non-cash benefits covers the others. For the full cost of employing someone, see what an employee costs on top of salary.
Before the next loan is approved, work out the monthly fringe benefit tax on it. If the figure surprises you, change the rate or the terms before anyone signs.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
