TAXES ON EMPLOYMENT INCOME

TAXES ON EMPLOYMENT INCOME

Who is an Employer?

This is a person (individual or corporate body) that employs another individual in exchange for money.

Who is an employee?

This is an individual engaged in productive work in exchange for money.

What do we mean by employment?

Employment can take the form of:

  • Position of an individual in the employment of another.
  • Directorship of a company.
  • A position where the holder is paid a fixed amount of money. This may be in form of a contract, permanent or part-time.
  • Holding or acting in any public office

What is employment income comprised of?

Employment income comprises of the following amounts according to the law:-

  • Amount of money paid by the employer to the employee
  • The value of any benefits in kind provided by or on behalf of the employer
  • Any amount of compensation of termination of employment or contract
  • Insurance premiums paid by a tax exempt employer for life insurance of an employee and or his descendants
  • Payment in respect of change of employment/contract terms of payment for agreement to any restrictive conditions of employment
  • Wages, salaries, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity, bonus and the amount of any travelling by virtual of one’s employment, entertainment, utilities, cost of living, housing, medical or other allowance
  • Value shares received by an employee under employee share acquisition scheme less consideration if any
  • Consideration for the grant or option to acquire shares.
  • Amount of any gain on disposal of a right or option to acquire shares under an employee share scheme.

Please note: Each or any of the above in combination comprise employment income

What gains of the employee are not taxed?

Pension: Pension is tax exempt

Medical Expenses: Payment on receiving medical attention or refund to the employee, the amount of money spent to receive medical attention.

Life Insurance: Premiums paid by a taxable employer for insurance of life of an employee or his/her dependant(s)

Official employment expenditure: Allowances for discharge or refund on amount spent by an employee while performing duties of his employer

Meals/Refreshments: The value of meals/refreshments provided to all employees at equal terms in premises operated by or on behalf of the employer

Retirement Fund: Employer’s contribution to a retirement fund for the benefit of the employee (employee’s contribution is taxable)

Shares: The value of a right or option to acquire shares granted to an employee under an employee share acquisition scheme.

Local Service Tax: This is deductible before computing tax.

Other benefits: Any benefit whose total value is less than Ugx 10,000 during the month

Threshold: The first Ugx 235,000 per month is tax free for all resident employees

Terminal benefits: 25% of terminal benefits (for employees who have served the employer for at least 10 years)

Transport Costs: Cost of passage incurred by the employer in respect of employee’s appointment if recruited out of Uganda for employer’s sole purpose (only applies to non-Ugandans)

Passage Costs: Allowances/Reimbursement of the actual cost of accommodation and travel, meals and refreshments in the course of employment duties.

What is a benefit in kind?

This is facilitation directly/indirectly by an employer to an employee in relation to past, present or future employment (may not necessarily be included in the contract). A benefit in kind is one provided by an employer, third party of an employer or associate of an employer.

What are the non-cash employment benefits taxable under the law?

  • Use of official motor vehicle for private purposes
  • Provision of domestic servants, utilities, house keeper, driver
  • Meals, refreshments and entertainment
  • Relief or debt obligations/interest waiver of obligation of employee by the employer
  • Provision of property by an employer to an employee (at non-arm’s length terms)
  • Provision of residential accommodation
  • Difference between interest at statutory rate and rate at which loans are granted
  • Any other benefit provided by the employer

When is benefit deemed to have been provided by the employer?

A benefit need not be provided by the employer or provided to the employee. It can be provided by the associate of the employer or can be provided to an associate of the employee.

When is a benefit said to have been obtained in respect of employment?

  • When it is provided by an employer or by a third party under arrangement with the employer or an associate of the employer
  • When it is provided to an employee or an associate of an employee
  • When it is provided in respect of past, present or prospective employment

How are benefits valued?

According to Section 19 Sub section 3 of the Act, benefits are valued as follows:

  1. Where a benefit provided by an employer to an employee consists of the use or availability for use, of a motor vehicle wholly or partly for private purposes of the employee, the value of the benefit is calculated according to the formula

 

(20% x A x B/C) – D where:

 

A is the market value of the motor vehicle at the time when it is first provided for private use by the employee

B is the number of days in a year of income on which the motor vehicle was used or available for use for private purposes by the employee for all or a part of the day

C is the number of days in a year of income

D is any payment made by the employee for the benefit

 

  1. Where a benefit provided by an employer to an employee consists of a provision of a housekeeper, driver, gardener or other domestic assistant. The value of the benefit is the total employment income paid to the domestic assistant in respect of services rendered to the employee, reduced by any payment made by the employee for the benefit. However, provision of a security private guard is not classified as a taxable benefit.

For example, if a company pays a gardener Ugx 150,000 per month, but the employee contributes Ugx 20,000 per month, the benefit derived by the employee is Ugx 130,000 (i.e. 150,000 – 20,000). If the employee doesn’t contribute anything, the benefit is Ugx 150,000.

  1. Where a benefit provided by an employer to an employee consists of the provision of any meal, refreshments or entertainment, the value of the benefit is the cost of the employer of providing the meal, refreshments or entertainment, reduced by any consideration paid by the employee for the meal, refreshments or entertainment.

For example, if the meals are provided for 26 days in a month, each meal costing Ugx 3,000 and the employee not contributing anything, then the benefit is Ugx 78,000 per month (3,000 x 26)

  1. Where a benefit provided by an employer to an employee consists of the provision of utilities in respect of the employee’s place of residence, the value of the benefit is the cost to the employer of providing the utilities reduced by any consideration paid by the employee for the utilities.

In this case, the actual payment receipts from the utility company can be used to ascertain the value (less actual contribution by the employee if any).

  1. Where a benefit provided by an employer to an employee consists of a loan, or loans in total, exceeding Ugx 1,000,000 at a rate of interest below the statutory rate, the value of the benefit is the difference between the interest paid during the year of income, if any and the interest which would have been paid if the loan had been made at the statutory rate for the year of income. Statutory rate here refers to the Bank of Uganda discount rate at the commencement of the year of income.

For example, if an employer gives an employee a school fees loan of Ugx 400,000, a furniture loan of Ugx 500,000 and an appliance loan of Ugx 300,000 at 10% interest per month when the statutory rate is 15%, the benefit would be Ugx 60,000 (i.e. 1,200,000 x 15%) – (1,200,000 x 10%) = 180,000 – 120,000.

  1. Where a benefit provided by an employer to an employee consists of a waiver by an employer of an obligation of the employee to pay or repay an amount owing to the employer or to any other person, the value of the benefit is the amount waived

For example, in the month of January, 2021, an employee owed a bank Ugx 300,000. The employer decided to pay the full amount for the employee on 31st January, 2021 and opted not to recover that amount from the employee. The employee has obtained a benefit equal to Ugx 300,000 for the month of January which should be part of her employment income.

  1. Where a benefit provided by an employer to an employee consists of the transfer or use of property or the provision of services, the value of the benefit is the market value of the property or service at the time the benefit is provided, reduced by any payment made by the employee for the benefit

For example, a company transferred a car valued at Ugx 5,000,000 to an employee in February 2019. The employee was asked to contribute Ugx 1,000,000 for that car. The employee derived a benefit equal to Ugx 4,000,000 in February, which should be included in his employment income.

  1. Where a benefit provided by an employer to an employee consists of the provision of accommodation or housing in kind, the value of the benefit is the lesser of
  • The market rate of the accommodation or housing reduced by any payment made by the employee for the benefit or
  • 15% of the employment income, including the amount referred to in paragraph (a), paid by the employer to the employee for the year of income in which the accommodation or housing was provided

For example, a company pays basic salary of Ugx 3,000,000 per month, transport allowance of Ugx 300,000 per month and medical allowance of Ugx 200,000 per month. They provided him with a company house whose market rate is Ugx 600,000 per month for which he contributes Ugx 50,000 per month. The benefit derived by the employee is the lesser of

  • (600,000 – 50,000) = 550,000 and
  • 15% (3,000,000 + 300,000 + 200,000 + 550,000) = 607,500.

In this case, the housing benefit is Ugx 550,000

  1. The value of any cash benefit provided by an employer to an employee which is not covered by the above clauses is the market value of the benefit, at the time the benefit is reduced by any payment made by the employee for the benefit.

What are Pay As You earn (PAYE) rates?

MONTHLY CHARGEABLE INCOME RATE OF TAX
Not exceeding Ugx 235,000 Nil
Exceeding Ugx 235,000 but not exceeding Ugx 335,000 10% of the amount by which chargeable income exceeds Ugx 235,000
Exceeding Ugx 335,000 but not exceeding Ugx 410,000 Ugx 10,000 plus 20% of the amount by which chargeable income exceeds Ugx 335,000
Exceeding Ugx 410,000 (a)  Ugx 25,000 plus 30% of the amount by which chargeable income exceeds Ugx 410,000

(b)  Where the chargeable income of an individual exceeds Ugx 10,000,000 per month, an additional 10% is charged on the amount by which the chargeable income exceeds Ugx 10,000,000 per month

 

Please note: Nonresident employees are not entitled to the threshold (Ugx 235,000). So, at every amount under rates of tax, add Ugx 23,500 or 10% of 235,000

How is part-time allowance treated?

  • Employees who are engaged on a part-time basis are deemed in principle to be earning income from more than one source
  • Part-time allowance/earnings are taxed at a flat rate of 30% of the total amount earned
  • An employee aggrieved by this treatment may submit a return of emoluments from all sources and make a claim of tax over paid.

What are the obligations of the employer?

The income tax law provides for obligation of the employer as summarized below:

Withholding: To deduct the correct tax at the time of effecting payment to a liable employee

Remitting: To remit the total tax by the 15th day of the immediately following month

Accountability: Account for the tax deducted from the employee on a monthly basis

Maintenance of employees’ records:  To maintain records and keep them for inspection by URA on demand for at least 5 years

What are the obligations of an employee?

  • If you’re getting income from more than one source, complete an end of the year return and declare
  • Declare total income from all sources including business income
  • Show total tax paid at source such as PAYE, Withholding tax or provisional tax. This excludes presumptive tax and rental tax paid by such an employee.
  • Declare all tax payable

What are the rights of an employee?

  • Is not required to furnish return if taxpayers source of income is only one employment and tax is fully deducted and paid at source
  • Is entitled to claim refund of overpaid tax where applicable.
  • Is entitled to accountability for all taxes deducted and paid at source by the employer

Therefore, it is in the interest of the taxpayer to file a return of income where he/she has multiple sources of income. No one can enjoy a refund of overpaid tax without making a declaration.

What happens if tax is defaulted?

An employer who fails to withhold tax as required by law is personally liable to pay the tax together with any penal tax and interest thereon

However the employer is entitled to recover the tax from the employee, if he/she wishes to do so, but cannot recover the interest or penalty from the employee.

 

 

 

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