Did you Know That There is a tax implication on interest-free or low-interest loans granted to employees, company directors and their relatives? All employers should pay Fringe Benefit Tax (FBT) on such loans provided to employees at an interest rate which is lower than the market rate.
Fringe Benefit Tax is mandatory tax payable by all employers, whether the employer is exempted from tax or not, at the resident Corporate income tax rate of 30%. The taxable value (benefit) is the difference between actual interest charged and the interest computed using the Commissioner’s prescribed rate published quarterly.
The prescribed rate of interest is based on the market lending rates. The directors and employees are not personally taxed on the benefit as the tax is borne by the employer.
FBT is due and payable on or before 9th of the following month and is paid together with Pay as You Earn (PAYE). All employers are required to ensure compliance.
Example;
Employee A gets a loan of Ksh. 5,000,000 from his employer at an interest rate of 2% . The market lending interest rate for the month is 9%.
Fringe Benefit is (9% – 2% = 7%) = Kshs.5, 000,000 x 7%/12 = Kshs. 29,166.67 for the month
Fringe Benefit tax payable by employer for the month is Kshs. 29,166.67 x 30% = Kshs. 8,750.
For the following months, FBT will be computed based on the outstanding loan amount after repayment.
To help you ensure compliance with all payroll taxes and other statutory deductions, MGK payroll team is prepared to support you in processing your monthly payroll accurately and timely. The team also support you to file the returns and to remit the payroll taxes and other statutory deductions. Please feel free to reach out to us on: enquiries@mgkconsult.co.ke for any enquiries.
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