globaltaxnews.ey.comSign up for tax alert emailsPrintDownload

20 February 2023

Kenya’s Court of Appeal declares National Social Security Fund Act of 2013 proposing increase to monthly contributions constitutional

  • The Court of Appeal of Kenya has declared that the National Social Security Fund (NSSF) Act No. 45 of 2013 (the Act) was constitutionally enacted thereby overturning the earlier ruling by the Employment and Labor Relations Court which had declared the law unconstitutional.

  • The NSSF Act sought to revise the monthly contributions by both employer and employee from KES200 to a 6% deduction operated in the Tier 1 and Tier II system. The implementation of the Act was suspended by a court order in 2014. The law is now effective immediately following the appellate court ruling.

  • Employers should assess how the revised contributions will impact their business activities. Moreover, they should ensure compliance with this development to mitigate possible penalties.

Executive summary

The National Social Security Fund (NSSF) Act No. 45 of 2013 was assented into law on 24 December 2013 with the effective date of 10 January 2014. However, the implementation of the Act was suspended by a court order in 2014.

The Act was declared unconstitutional by the Employment and Labor Relations Court (ELRC) on 19 September 2022.

Dissatisfied with the decision of the ELRC, the Appellants moved to the Court of Appeal with issues for determination as outlined below.

Whether the ELRC had jurisdiction to determine the constitutional validity of the Act.

Whether the enactment of the Act required the concurrence of both the National Assembly and the Senate.

The Court of Appeal held that the ELRC bench wrongly assumed jurisdiction. It stated that ELRC jurisdiction is limited to matters that arise from employment disputes or where the employer-employee relationship subsists. Since this was a matter challenging the constitutionality of a statute it rightfully falls under the jurisdiction of the High Court under the provisions of Article 165(3) of the Constitution.

On the issue of which house has competence to legislate the matter, the appellate court held that matters of social security fell within the ambit of the National Government as stated in the Fourth Schedule of the Constitution and did not require concurrence of the Senate. Therefore, it declared that the Act was constitutionally enacted.

Detailed discussion

Overview

The Act sought to revise the monthly contributions by both employees and employers from a fixed amount of KES200 to a 6% percent deduction operated in the Tier 1 and Tier II system. The Tier I contributions are contributions in respect to pensionable earnings up to the Lower Earnings Limit (LEL) of KES6,000. The Tier II contributions are contributions in respect to pensionable earnings up to the Upper Earnings Limit (UEL) of KES18,000. The rate for each tier is 6% from the employee and 6% from the employer subject to an upper contribution limit of KES2,160 for employees earning above KES18,000.

The contributions relating to the earnings below the LEL (a maximum of KES720 for both employer and employee) will be credited to what will be known as a Tier I account while the balance of the contribution for earnings between the LEL and the UEL (up to a maximum of KES1,440 for both employer and employee) will be credited to what will be known as a Tier II account. Employers have an option to opt out of Tier II contributions to NSSF and remit them to a contracted-out scheme.

The law, which is effective immediately, seeks to increase savings towards retirements.

Next steps

Employers should assess how the increase in contributions will impact their business activities. Moreover, they should ensure compliance with this development to mitigate possible penalties.

Guidance is expected from the NSSF on the contracting out process for employers who opt to contribute Tier II contributions to a contracted-out scheme.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

Francis Kamau | francis.kamau@ke.ey.com

  • Christopher Kirathe | christopher.kirathe@ke.ey.com

  • Hadijah Nannyomo | hadijah.nannyomo@ke.ey.com

  • Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

    Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

    Ernst & Young LLP (United States), Pan African Tax Desk, New York

    Brigitte Keirby-Smith | brigitte.f.keirby-smith1@ey.com

  • Dele A. Olagun-Samuel | dele.olagun@ey.com

    Document ID: 2023-5210

     
     

    The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

     

    Copyright © 2024, Ernst & Young LLP.

     

    All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

     

    Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

     

    "EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

     

    Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

     


    Cookie Settings

    This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


    Yes, I accept         Find out more