how to pay yourself

How to pay yourself. As the sole director of your company

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As the sole director of a limited company in Kenya, paying yourself involves balancing tax efficiency, legal compliance, and business sustainability. You can pay yourself through salary, dividends, director’s fees, or a combination, each with distinct tax and compliance implications. Below is a comprehensive guide for 2025, based on Kenyan laws including the Companies Act 2015, Income Tax Act, Finance Act 2023, and KRA regulations.

Payment Options and How to Implement Them

1. Salary (Treating Yourself as an Employee)

Paying yourself a salary means registering as an employee of your company, subject to standard payroll deductions.

  • How to Implement:
    • Contract: Draft an employment contract defining your role (e.g., CEO or manager), even as the sole director, to formalize the salary. This is optional but clarifies your employee status for KRA.
    • Payroll Setup: Register with KRA for a PAYE PIN (via iTax) if not already done. Use payroll software or eTIMS-compliant templates to generate payslips.
    • Salary Amount: Choose a reasonable salary based on your company’s revenue and industry standards (e.g., KES 50,000). Ensure the company can afford it to avoid liquidity issues.
    • Deductions: Deduct PAYE, NSSF, NHIF, and AHL (see below for example). Remit to KRA by the 9th (PAYE, NHIF, AHL) and 15th (NSSF) of the next month.
    • Accounting: Record the salary as a business expense, reducing your company’s Corporate Income Tax (CIT) liability (30% on profits).
  • Tax Implications (Example for KES 50,000):
    • PAYE:
      • KES 0–24,000: 10% = KES 2,400.
      • KES 24,001–32,333: 25% = KES 2,083.25.
      • KES 32,334–50,000: 30% = KES 5,300.10.
      • Total before relief: KES 9,783.35.
      • Less personal relief (KES 2,400) and NHIF relief (15% of KES 1,375 = KES 206.25) = KES 7,177.
    • NSSF: 6% of KES 36,000 (cap) = KES 2,160.
    • NHIF: 2.75% of KES 50,000 = KES 1,375.
    • AHL: 1.5% of KES 50,000 = KES 750.
    • Total Deductions: KES 7,177 + 2,160 + 1,375 + 750 = KES 11,462.
    • Net Salary: KES 50,000 – KES 11,462 = KES 38,538.
    • Employer Costs: Company pays additional NSSF (KES 2,160) and AHL (KES 750), deductible for CIT.
  • Advantages:
    • Salary is a tax-deductible expense, lowering CIT.
    • Eligible for personal relief (KES 2,400/month) and social benefits (NSSF, NHIF).
    • Consistent income stream.
  • Disadvantages:
    • High deductions (e.g., 23% of KES 50,000).
    • Mandatory employer contributions increase costs.
  • Compliance:
    • File monthly PAYE, NHIF, and AHL returns via iTax by the 9th; NSSF by the 15th.
    • Late remittances incur penalties (e.g., 5% of PAYE due, KES 2,000–20,000 for NSSF/NHIF).

2. Dividends

Dividends are payments from company profits to shareholders (you, as the sole director and likely sole shareholder).

  • How to Implement:
    • Profitability: Ensure the company has distributable profits (after CIT at 30%). Per the Companies Act 2015 (Section 424), dividends can only be paid from profits, not capital, to avoid insolvency risks.
    • Board Resolution: As sole director, pass a resolution approving the dividend (document this, even if informal). Specify the amount and timing.
    • Withholding Tax: Deduct 5% withholding tax for residents (per Income Tax Act) and remit to KRA by the 20th of the next month.
    • Payment: Transfer the net dividend to your personal account. Issue a dividend voucher for records.
    • Accounting: Record dividends as a distribution of equity, not a business expense (not deductible for CIT).
  • Tax Implications (Example for KES 50,000 Dividend):
    • Withholding tax: 5% of KES 50,000 = KES 2,500.
    • Net dividend: KES 50,000 – KES 2,500 = KES 47,500.
    • Company-level tax: Profits are taxed at 30% CIT before distribution (e.g., KES 71,429 pre-tax profit yields KES 50,000 after CIT).
  • Advantages:
    • Lower tax rate (5% vs. 23%+ for salary deductions).
    • No NSSF, NHIF, or AHL.
    • Flexible timing (pay when profits allow).
  • Disadvantages:
    • Not deductible for CIT, so company pays 30% tax first.
    • Requires sufficient profits, limiting frequency.
    • No social benefits (NSSF/NHIF).
  • Compliance:
    • File withholding tax returns via iTax.
    • Maintain dividend registers and vouchers for audits.
    • Ensure solvency test (Companies Act) to avoid illegal distributions.

3. Director’s Fees

Director’s fees are payments for your services as a director, distinct from a salary.

  • How to Implement:
    • Approval: Pass a resolution (as sole director) approving the fee, justified by your duties (e.g., strategic oversight). Include in company by-laws or minutes.
    • Amount: Set a reasonable fee (e.g., KES 50,000/month) based on industry norms and company size to avoid KRA scrutiny.
    • Withholding Tax: Deduct 5% withholding tax for residents and remit to KRA by the 20th of the next month.
    • Payment: Transfer to your personal account. Issue an invoice or fee note for records.
    • Accounting: Treat as a deductible expense for CIT, like a salary.
  • Tax Implications (Example for KES 50,000):
    • Withholding tax: 5% of KES 50,000 = KES 2,500.
    • Net fee: KES 50,000 – KES 2,500 = KES 47,500.
    • Company deducts KES 50,000 from taxable income, saving KES 15,000 (30% CIT).
  • Advantages:
    • Lower tax (5% vs. salary deductions).
    • Deductible for CIT.
    • No NSSF, NHIF, or AHL (unless KRA reclassifies as salary).
  • Disadvantages:
    • No personal relief or social benefits.
    • KRA may reclassify as salary if paid regularly like a salary (e.g., monthly), triggering PAYE/NSSF/NHIF/AHL.
    • Requires justification to avoid being deemed excessive.
  • Compliance:
    • File withholding tax returns via iTax.
    • Document duties to justify fees (e.g., board minutes).
    • Avoid fixed monthly payments to reduce risk of reclassification.

4. Combination Approach

You can mix salary, dividends, and director’s fees to optimize tax and cash flow:

  • Example:
    • Salary: KES 50,000/month (see previous calculations).
    • Director’s Fee: KES 50,000/month (KES 2,500 withholding tax).
    • Dividends: KES 50,000/quarter (KES 2,500 withholding tax).
    • Total monthly net: ~KES 38,538 (salary) + KES 47,500 (fee) = KES 86,038, plus periodic dividends.
  • Benefits: Balances deductible expenses (salary, fees) with low-tax distributions (dividends), while ensuring social benefits (NSSF/NHIF).

Recommended Approach for A Beginner

Here’s a simple beginners plan:

  1. Start with a Modest Salary:
    • Pay yourself KES 24,000/month to minimize PAYE (KES 0 after relief) and secure NSSF/NHIF benefits:
      • Deductions: NSSF (KES 1,440), NHIF (KES 660), AHL (KES 360) = KES 2,460.
      • Net: KES 21,540.
      • Company deducts KES 24,000 for CIT and pays employer NSSF (KES 1,440) and AHL (KES 360).
  2. Supplement with Director’s Fees:
    • Pay KES 20,000/month as a director’s fee:
      • Withholding tax: 5% = KES 1,000.
      • Net: KES 19,000.
      • Deductible for CIT, saving KES 6,000 (30%).
  3. Pay Dividends Sparingly:
    • Distribute dividends (e.g., KES 50,000/quarter) only when profits allow:
      • Withholding tax: 5% = KES 2,500.
      • Net: KES 47,500.
      • Ensure profits cover CIT first.
  • Total Monthly Net: KES 21,540 (salary) + KES 19,000 (fee) = KES 40,540, plus dividends as profits permit.
  • Company Benefits: Salary and fees reduce CIT liability (e.g., KES 44,000 total = KES 13,200 CIT savings).

Practical Steps

  1. Register for Taxes:
    • Ensure your company has a KRA PIN and is registered for CIT, VAT (if turnover > KES 5 million), and PAYE.
    • Register yourself for a personal KRA PIN if not already done.
  2. Set Up Payments:
    • Salary: Process through payroll, issue eTIMS-compliant payslips.
    • Fees: Issue fee notes, document in board resolutions.
    • Dividends: Declare via resolution, issue vouchers.
  3. Banking:
    • Maintain separate company and personal bank accounts.
    • Transfer net amounts (salary, fees, dividends) to your personal account.
  4. Compliance:
    • File monthly PAYE/NSSF/NHIF/AHL returns (iTax, by 9th/15th).
    • File withholding tax for fees/dividends (iTax, by 20th).
    • File annual CIT returns (by June 30) and personal income tax returns (if receiving fees/dividends, by June 30).
    • Penalties for late filing: 5% of tax due (PAYE), KES 2,000–20,000 (NSSF/NHIF), 2% of CIT due (minimum KES 10,000).
  5. Record Keeping:
    • Keep payslips, fee notes, dividend vouchers, and board resolutions.
    • Use accounting software (e.g., QuickBooks) to track expenses and profits.
  6. Consult Experts:
    • Engage a CPA to structure payments and confirm compliance.
    • Contact KRA (support@kra.go.ke or iTax portal) for clarification on fees vs. salary classification.

Key Considerations

  • Tax Efficiency: Salary maximizes deductions but has high deductions (PAYE, NSSF, etc.). Fees and dividends are lower-taxed but less deductible or profit-dependent.
  • Sustainability: Ensure payments don’t strain cash flow, especially for a digital business with recurring costs (e.g., hosting, marketing).
  • KRA Scrutiny: Regular director’s fees may be reclassified as salary, triggering PAYE/NSSF/NHIF/AHL. Vary fee amounts or timing to reduce risk.
  • Social Benefits: Salary ensures NSSF (pension) and NHIF (health coverage), which fees/dividends don’t provide.
  • Legal Limits: Dividends require profits and solvency (Companies Act). Excessive fees may be disallowed by KRA if deemed unreasonable.

Example for Clarity

  • Monthly Plan:
    • Salary: KES 24,000 (net KES 21,540 after KES 2,460 deductions).
    • Director’s Fee: KES 20,000 (net KES 19,000 after KES 1,000 tax).
    • Total Net: KES 40,540.
  • Quarterly:
    • Dividend: KES 50,000 (net KES 47,500 after KES 2,500 tax, if profits allow).
  • Company Impact: KES 44,000 (salary + fee) reduces taxable profit, saving KES 13,200 in CIT annually.

If you prefer a different mix (e.g., higher salary like KES 50,000, no fees), I can recalculate deductions (e.g., KES 50,000 salary = KES 11,462 deductions, net KES 38,538). For KES 24,000, deductions are lower (KES 2,460, net KES 21,540).

Next Steps

  • Immediate Action: Decide your payment mix (e.g., KES 24,000 salary + KES 20,000 fee). Set up payroll and eTIMS for compliance.
  • Documentation: Draft a resolution for fees/dividends and an employment contract for salary.
  • Compliance Check: Register for all taxes and verify remittances with KRA.
  • Growth Planning: As your company scales, revisit payments (e.g., increase dividends if profits grow).

Sources: Companies Act 2015, Income Tax Act, Finance Act 2023, NSSF Act 2013, NHIF (Amendment) Act 2022, Affordable Housing Act 2024, and KRA guidelines.

Disclaimer: This is general guidance. Consult a tax advisor or KRA to confirm your structure and avoid misclassification risks.

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