Instalment tax: who owes it, the four dates, and the 20% penalty

KRA states plainly that instalment taxes are not payable by persons subject to Turnover Tax.

This is worth leading with because the two regimes sit next to each other in every accountant's conversation about small business tax, and it is easy to assume a TOT filer has both obligations. They do not. If your business is inside the TOT band, instalment tax is not something you need to budget for.

If you are unsure which side of that line you are on, our turnover tax calculator works it out from your gross sales.

Instalment tax is paid by individual taxpayers whose tax liability not fully covered under PAYE is over KShs 40,000 for the year.

Read that carefully, because the qualifier does the work. It is not about total tax. It is about the portion your employer is not already deducting. A salaried person with a side business is only in scope if the tax on the side business alone clears 40,000.

When projecting the liability, expected withholding tax for the year is netted off first. So if a large chunk of your consultancy income already has 5% WHT deducted at source, that reduces the net estimated liability you use to work out whether you are over the line at all.

KRA permits either basis.

Prior year basis. Take last year's tax and multiply by 110%. Simple, and the safer option if your income is stable, because it removes the estimating risk entirely.

Current year basis. Estimate this year's profit and the tax on it. KRA notes this is the method for new businesses, and for those who were making losses and have turned profitable. It is also the one that exposes you to the underpayment penalty if you estimate low.

For most taxpayers the instalments are spread evenly at 25%, due on the 20th day of the 4th, 6th, 9th and 12th months of the year of income. For a December year-end that is 20 April, 20 June, 20 September and 20 December.

Taxpayers in the agricultural sector are different. They pay 75% in the 9th month and 25% in the 12th month, which tracks the fact that farm income does not arrive in four even lumps. If you are farming and you have been paying quarterly, you have been on the wrong schedule.

Separately, the balance of tax — whatever the four instalments did not cover — is due by the end of the 4th month after year-end. For a December year-end, that is 30 April.

Underpaying instalment tax carries a penalty of 20% of the difference between what you should have paid and what you did.

That is the case for the prior-year basis if you are unsure. Multiplying last year by 110% is a known quantity. A cheerful estimate of this year's profit that comes in low is not, and the shortfall is charged at 20%.

Instalment tax is paid via iTax. You generate a payment slip, then present it with a cheque drawn in favour of Kenya Revenue Authority at any of the partner banks. As with every KRA payment, the slip carries the PRN, and the PRN is what ties the money to your account.