Using staff deductions as working capital
Why a Kenyan employer cannot hold back PAYE, SHIF or NSSF deductions to ease cash flow, the offences involved, and how to keep the money ring-fenced.
By Achekam · · 4 min read · For Running a business businesses in Kenya
Cash is tight. A big customer is paying late, the rent is due and the bank has said no to an overdraft increase. Sitting in the account is the money deducted from staff salaries last month for PAYE, SHIF and NSSF, waiting to go to KRA, the Social Health Authority and NSSF. It is tempting to think: we will pay it next month, when things settle.
The temptation is understandable, but acting on it is one of the most expensive mistakes a Kenyan employer can make. The money is not the business's to borrow, and the law treats holding it back as far more than a late payment. This article explains why, sets out the penalties, and suggests how to keep deductions out of reach of the day-to-day cash.
Deductions are not the business's money
When you deduct PAYE, SHIF or NSSF from an employee's pay, you are holding the employee's money on its way to someone else. The employee has already been paid less because of it. If it does not arrive, the employee has paid for something that was never passed on in their name, through no fault of their own.
NSSF says it directly: it asks employers not to use employees' NSSF contributions as working capital or as investment in the business. The same reasoning applies to every deduction.
You can read NSSF's guidance to employers on the NSSF employers page, which sets out employers' contribution duties and its request not to use contributions as working capital.
The Employment Act offence for not remitting
The Employment Act, as published on Kenya Law, does not treat a failure to pass on deductions as a mere administrative lapse. Under section 19, an employer that makes deductions and fails to remit them commits an offence, punishable by a fine of up to one hundred thousand shillings or two years' imprisonment.
The court can also order the employer to refund the employee and to pay the intended recipient out of the employer's own funds. In other words, the business can end up paying the same amount twice.
SHIF offences and fines
The Social Health Authority says employers deduct SHIF contributions of 2.75% from employees' gross salaries and are responsible for calculating and remitting them to SHA.
The Social Health Insurance Act makes it an offence for an employer, without lawful excuse, to fail to pay contributions it is liable for, or to make unauthorised deductions from wages for them. Under section 48(1), the penalty is a fine of up to two million shillings or up to three years' imprisonment.
NSSF: the employer's own share too
The NSSF Act adds a related rule in section 22. An employer may not deduct its own contribution from the employee's earnings; it must pay that share from its own resources. So an employer under pressure cannot shift its part of the cost onto staff either. More on that in the employer's share of NSSF.
PAYE penalties and interest
For PAYE, KRA says late filing of a return attracts a penalty of the higher of 25% of the tax due or KShs 10,000. Late payment attracts a 5% penalty plus interest of 1% per month, or part of a month, until paid. And failure to deduct and account for PAYE attracts 25% of the tax involved or KShs 10,000, whichever is higher.
Borrowing a month's PAYE therefore costs at least the penalty and a month's interest, before any question of offences. That makes it a very expensive way to borrow. Penalties across all the payroll deductions are set out in late payment penalties on Kenyan payroll.
Liability accounts and payment records in Achekam
The first defence is visibility. In Achekam, an 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. For Kenyan payroll, each contribution posts to its own liability account, for example PAYE, and Housing Levy Payable (KRA). Anyone looking at the balance sheet can see exactly how much of the bank balance belongs to KRA, SHA and NSSF.
Each approved run also has a payment schedule, downloadable as CSV. Marking it paid only records the fact; Achekam moves no money. Likewise, Achekam does not file or pay Kenyan payroll returns. A person records the filing made on the authority's portal, with the reference the portal gave, and a second person confirms each payment.
That two-person step is useful for exactly this situation. If deductions are not being paid, the liability accounts keep growing and the confirmations stop, and both are visible to someone other than the person handling the cash.
Cash planning that keeps deductions ring-fenced
- Treat deductions as spent on payday. When you plan cash, the net pay and the deductions leave together.
- Use a separate bank account for statutory deductions, and move the money into it when wages are paid.
- Check the liability accounts monthly. Each should return to nil once the month's payments are made.
- Pay on time, every month, even when the business is under pressure. Talk to the bank or suppliers instead.
- If you cannot pay, still file, and talk to the authority early. Hiding the problem makes it worse.
- Budget the full cost of employing staff, including your own contributions; see what an employee costs on top of salary.
Look at your payroll liability accounts today. If any of them is higher than one month's deductions, that is the first payment to make.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
