One area that often catches businesses and professionals by surprise is installment or advance tax payments. Unlike the annual tax return where all liability is settled at once, many tax systems — including Kenya's — require companies and individuals with significant income to pay tax in advance, spread across the year.
What Are Installment Taxes?
Installment taxes, also known as advance taxes, are periodic prepayments of your expected annual income tax liability. These payments are made throughout the year rather than as a single lump sum at year-end.
Purpose of Installment Taxes
The goal of installment taxes is simple:
- ✅ Help taxpayers manage their cash flow more effectively
- ✅ Ensure governments receive steady revenue throughout the year
- ✅ Reduce the burden of large year-end tax payments
Who Needs to Pay Installment Taxes?
For Companies:
All companies in Kenya are required to pay installment tax based on their estimated tax liability for the year.
For Individuals:
Individuals in business or consultancy with tax liability exceeding Ksh 40,000 in the previous year are required to pay installments.
How Installment Taxes Are Calculated
Typically, these payments are calculated as a percentage of the previous year's tax liability or based on current year projections.
For Companies:
Companies pay installments based on the higher of:
- 100% of the previous year's tax liability divided into 4 equal installments
- 90% of the current year's estimated tax liability divided into 4 equal installments
For Individuals:
Individuals pay 4 equal installments based on 100% of the previous year's tax liability.
Example: Company Installment Tax Calculation
Previous year's tax liability: Ksh 800,000
Current year estimated tax liability: Ksh 1,000,000
Calculation:
Option 1: 100% of previous year = Ksh 800,000 ÷ 4 = Ksh 200,000 per quarter
Option 2: 90% of current year = Ksh 900,000 ÷ 4 = Ksh 225,000 per quarter
Company would pay Ksh 225,000 per quarter (the higher amount)
Installment Tax Due Dates
| Installment | Due Date | Period Covered |
|---|---|---|
| 1st Installment | 20th April | January - March |
| 2nd Installment | 20th June | April - June |
| 3rd Installment | 20th September | July - September |
| 4th Installment | 20th December | October - December |
Consequences of Non-Compliance
Failure to pay installment taxes on time leads to:
- ⚠️ Penalties: 5% of the unpaid tax
- ⚠️ Interest: 1% per month on unpaid amounts
- ⚠️ Potential difficulties in obtaining compliance certificates
Best Practices for Managing Installment Taxes
✅ Accurate Estimation
Develop realistic projections of your annual income to calculate accurate installment amounts.
✅ Cash Flow Planning
Include installment taxes in your cash flow forecasts to ensure you have sufficient funds when payments are due.
✅ Calendar Reminders
Set reminders for all installment due dates to avoid missing payments and incurring penalties.
✅ Regular Reviews
Review your tax projections quarterly and adjust installment payments if your financial situation changes significantly.
✅ Professional Advice
Consult with a tax professional to ensure you're calculating installments correctly and taking advantage of all available provisions.
💡 Key Takeaways
- Installment tax is not an extra tax — it's simply paying your income tax in installments
- Payments are based on previous year's liability or current year estimates
- Missing payments results in penalties and interest
- Proper planning is essential for cash flow management
- Overpayments can be carried forward or refunded
How to Make Installment Tax Payments
- Log in to your iTax account
- Navigate to the "Payments" section
- Select "Installment Tax"
- Enter the payment details and amount
- Generate a payment slip
- Make payment at your bank or via mobile banking
Final Thoughts
For growing businesses and consultants, understanding and planning for installment tax payments is crucial to maintaining liquidity and staying compliant. By incorporating these payments into your financial planning, you can avoid cash flow surprises and potential penalties.
Need help with installment tax planning? Contact Imeka Consult for professional tax advisory services to help you manage your tax obligations effectively.