Avoiding the instalment tax underpayment penalty
How KRA works out the instalment tax underpayment penalty for a Kenyan client, how the estimate basis affects it, and how a firm helps the client avoid it.
By Achekam · · 5 min read · For Accountants & audit firms in Kenya
A client has a good year. Profits are well up on last year, the directors are pleased, and the final tax computation shows a large balance due. Then the firm notices that the instalments paid during the year were based on last year's much smaller profit, and the question becomes whether that was enough to avoid a penalty.
Instalment tax is an area where a client can incur a penalty without having done anything obviously wrong. The rules reward a deliberate choice of estimate and steady payment on four fixed dates. This article explains how KRA describes the penalty, the two ways of estimating, how withholding tax and farming change the picture, and how a firm keeps clients on track.
The penalty on the shortfall
KRA says the penalty for underpaying instalment tax is 20% of the difference between the instalment tax payable for the year and the instalment tax actually paid. KRA's instalment tax page sets out who pays it, the prior-year (110%) and current-year methods, and the four due dates.
The penalty is measured on the shortfall in instalments, not on the final tax bill. A balance due on the return does not by itself mean the instalments were short; what matters is what the instalments should have been. Late payment of the final balance carries its own consequences, covered in late payment interest and its cap.
Prior-year basis or current-year basis
KRA says instalment tax can be estimated on one of two bases:
- Prior-year basis: last year's tax multiplied by 110%.
- Current-year basis: an estimate of the current year's profit and the tax on it.
In both cases, KRA says the expected withholding tax for the year is netted off in arriving at the estimated liability. The instalment due is based on the lower of 110% of the previous year's tax or the year's estimate, which is why the choice of basis matters.
Choosing between them
The choice depends on where the year is heading:
| The client's year | Basis that usually suits | What to watch |
|---|---|---|
| Profits rising well above last year | Prior-year basis, likely the lower figure | The final balance due after the year end will be larger |
| Profits falling below last year | Current-year basis | The estimate must be realistic and documented |
| First year, or no reliable prior year | Current-year basis | Build the estimate from management accounts |
Whichever basis is used, write down which one, the figures behind it and the date it was set. If the client later disputes a penalty, a dated record of a reasonable estimate is the firm's best evidence.
Netting expected withholding tax
Clients that suffer withholding tax on their income, such as consultants, contractors and professional firms, can reduce their instalments by the withholding they expect for the year. KRA says the expected withholding tax is netted off in arriving at the estimated liability.
The word "expected" matters. The firm should estimate withholding from contracts in hand and last year's certificates, not from optimism. If the withholding certificates later fall short of the estimate, the instalments paid may turn out to be too low.
The four dates, and the farming exception
KRA says instalment tax is paid in four instalments of 25% each by the 20th day of the 4th, 6th, 9th and 12th months of the year of income. Taxpayers in the agricultural sector follow a different pattern: 75% in the 9th month and 25% in the 12th month.
A worked example in words
For a client with a calendar year end, the 4th, 6th, 9th and 12th months are April, June, September and December, so the four payments fall due by the 20th of each of those months, each a quarter of the year's estimate. A farming client with the same year end pays three quarters of its estimate in the 9th month, September, and the last quarter in December. The dates are explained for other year ends in corporation tax instalment dates in Kenya.
After the year end, the balance of tax shown by the return is payable by the end of the 4th month after the year end, according to KRA. KRA's page illustrates this with an old date for December year ends, so work the date out for the current year rather than copying the example.
Computing and reviewing instalments in Achekam
Achekam can compute Kenyan instalment tax, along with corporation tax, VAT, withholding tax, turnover tax, capital gains tax and stamp duty, once its rules are approved. Extractive, petroleum and non-resident digital profiles are refused as "assessment required" and need to be handled outside the standard calculators.
Staff open a Kenyan tax profile for the client and start returns that move through prepare, review and approve by different people. Payments are recorded with KRA's reference and confirmed by another person; Achekam does not pay the tax.
The separation of duties matters for instalments. A Kenyan tax return in Achekam is prepared by one person, reviewed by a second and approved by a third, after which its rule snapshot and figures are frozen. An amendment becomes a new version rather than overwriting the old one, so if the estimate is revised mid-year, the earlier figure and the reason for the change both remain on record. How instalments paid show up in the year-end tax note is covered in instalments in the tax note.
Reminders to clients before each date
- At the start of the year: agree the basis, the estimate and the expected withholding with the client, in writing.
- A few weeks before each due date: send the amount and the date, with how to pay.
- After each due date: confirm the payment was made and record KRA's reference.
- Before the 9th-month payment: revisit the estimate with the latest management accounts, especially for farming clients whose largest payment falls then.
- At the year end: compare instalments paid with the final liability and explain any balance and its due date.
The conversation to have early
Raise the instalment basis at the first meeting of the client's financial year. A decision made in the first quarter, with figures behind it, is far easier to defend than one reconstructed after the year end.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
