Kenyans’ ability to borrow is set to be further reduced with the expected new deductions this month by the National Social Security Fund (NSSF). This is as the industry awaits direction from the National Treasury.
Patrick Wameyo, a Financial Literacy Coach at Financial Academy and Technologies, has detailed how these new deductions will impact the payslip holders unable to access previous amounts owing to their now reduced ability to repay.
Yet even with the expected deductions, the Association of Pension Trustees and Administrators of Kenya (Aptak) still holds the opinion that the new rates are unconstitutional as upheld by the Supreme Court of Kenya.
“That Act (NSSF 2013) was declared unconstitutional, unlawful, null and void,” said Aptak Secretary General Boniface Mwangangi.
When asked about the effect expected with the upcoming rates, Mr Mwangangi maintained that employers should remit what the right amounts to NSSF referencing the previous Sh200 deductions for employee and employer.
“We have a law in place which says what should be done. And when that law is in place, NSSF has not done anything to anybody outside of that law but people have chosen by themselves for example to make contributions to NSSF outside what is provided for in the law,” he said.
The Council of Governors (CoG) has already written to county chiefs directing them to remit to the fund, citing the ruling by the Supreme Court of Kenya, as the two institutions tussle over tier II contributions.
The new rates taking effect this month are expected to increase member contributions from Sh2,160 to Sh4,320. This squeezes Sh2,160 more from their pockets.
Mr Wameyo explained to The Standard that this will reduce the net disposable income for Kenyans which will eventually slash the amounts they are eligible for when borrowing.
“Lenders apply only half the net disposable income when they are looking at your ability to repay a loan,” he said.
He gave an example of Sh8,000 being able to service a Sh300,000 Sacco loan comfortably over 36 months. However, even reducing someone’s income by Sh1,000 makes this payment plan a challenge.
“For every Sh1,000, almost a third or Sh100,000 of borrowing capacity is gone,” he said. “The more Sh1,000 you take, the more Sh100,000 of borrowing you are losing.”
“That is where the economy is hurting. When I am no longer able to borrow Sh100,000 because Sh1,000 is gone, then the credit consumption in the market will go down.”
As such, this then affects the growth of the gross domestic product (GDP).
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The new rates increase the lower-earning limit by Sh1,000 to Sh8,000 and double the upper-earning limit to Sh72,000.
With the rate at six per cent, it means for the new lower earning limit, you will pay Sh480 from the current Sh420. For the upper limit, the amount will shoot from Sh1,740 to Sh3,840.
As such you will now pay Sh4,320 from the current Sh2,160 if you make above the earning limit of Sh72,000. This is double the amount paid.
This is the same argument that the Council of Governors (CoG) has used to stop county chiefs from adhering to the new rates as per the NSSF Act 2013.
In a letter addressed to governors, CoG chief executive Mary Mwiti maintained that the Employment and Labour Relations Court declared the law unconstitutional and so did the Supreme Court of Kenya.
“Counties should remit to NSSF the correct contribution rates under the NSSF Act, Cap 258 of 1965 as per the schedule hereto,” she said.
National Treasury and Economic Planning Cabinet Secretary John Mbadi, during an interview with local media, however, defended the government’s raid on pay slips referencing the amendments to Pay As You Earn calculation that made the new taxes like Social Health Insurance Fund (Shif) and Affordable Housing Levy deductibles to provide relief to the employee.
Since NSSF is also an allowable tax deduction, it means the new deductions come with a slight relief as they will pay a slightly less PAYE.
“Before December, people were complaining they are being overtaxed because SHA and Housing Levy are taxed twice, but now we have cured that (through the Tax Laws Amendment Act),” he said.
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