Earlier this year, Kenyans marched to the streets in all parts of the country to protest aggressively against high taxation imposed on them by the introduction of the Finance Bill, 2024. The protests aimed to amplifying the citizens’ voices in rejecting high taxation on both goods and services and especially essential services. Less than a year down the line, Kenyans are grappling with a similar issue – the implementation of the Social Health Insurance Act (SHIA) of 2023 (the Act).
We note that the health insurance sector has overseen the replacement of the National Hospital Insurance Fund (NHIF), a State Parastatal that was established in 1966 as a department under the Ministry of Health, with the Social Health Authority (SHA) and the Social Health Insurance Fund (SHIF). The Act creates three funds: the Primary Health Fund, designed to cater for primary healthcare services from levels 1 to 3 health facilities; Social Health Insurance Fund designed to purchase healthcare services from levels 4 to 6 health facilities and; Emergency, Chronic and Critical Illness Fund designed to cater for emergency and chronic illness treatment. The purpose of the newly introduced funds is for healthcare to be affordable and accessible to Kenyans all over the country. The Funds, officially took effect on 1st October, 2024, and will be responsible for the management of all public health insurance contributions.
We delve into some of the key outlines of SHIF, and how it affects various stakeholders below.
SHIF Registration
To gain access to SHIF, the following individuals are required by the Act to register:
1) Every Kenyan;
2) A non-Kenyan who is ordinarily a resident of Kenya; and
3) A child born after the Commencement of the Act, that is, 19th October 2023.
Foreigners who intend to be in the country for a period of less than twelve months are required to have a health insurance to cater for any medical expenses that may arise during their visit. Failure to register with the authority attracts penalties such as exclusion from access to public services offered by both the National and County Governments and their respective entities. The Act does not provide for a timeline within which individuals should register after the commencement of the Act. However, employers are required to meet compliance requirements including registration of their employees. As per the SHIF guidelines, the first contribution date is 9th October 2024.
Who is a Beneficiary?
A beneficiary has been defined by the Act as any person who makes contributions to the fund; is below the age of (21) years, has no income but lives with a contributor; is below the age of (25) years and undergoing a full-time course of education at a higher learning institution; is living with disability and wholly depends on a contributor; and is a spouse of a contributor. The persons listed as beneficiaries are then exempted from registration.
Applicability of Insurance Relief to contributions made to SHIF
Previously, contributions made to the National Health Insurance Fund attracted an insurance relief of (15%) of the insurance premiums. The applicability of the relief to the SHIF contributions was not clear as the Income Tax Act only makes provision for contributions made to NHIF.
Furthermore, the Kenya Revenue Authority through a Notice dated 8th November 2024, clarified that the insurance relief does not apply to contributions made towards SHIF. This means that employers who had before remitting the deductions had offered the relief will have to deduct the same and remit to KRA.
How SHIF affects Employers
Per SHIA, it is mandatory for the employer to deduct the contribution of a salaried contributor and submit it to SHA on behalf of the employee, by the 9th day of every month. As such, employers are expected to register with SHA, for ease of documentation.
Additionally, employers are expected to inform SHA of changes in employee statuses. Specifically in cases of termination of employment, the employer is expected to notify the Authority within 30 days of such termination, and submit the SHA deduction from the employee’s contribution.
How SHIF affects Employees
The SHA shuffle introduces a more progressive contribution system compared to the fixed rates under NHIF. Employees now contribute 2.75% of their monthly salary, making the system more equitable, as contributions are aligned with income levels.
For example, someone earning Kshs. 20,000 will contribute around Kshs. 550 monthly, while higher earners—such as those earning Kshs. 1 million or more—will be required to contribute up to Kshs. 27,500. For self-employed individuals, their contribution will be determined by a means test, and the minimum contribution has been reduced from Kshs. 500 to Kshs. 300. Furthermore, the government will account for the contributions for vulnerable populations through a combination of national and county funding, easing the financial burden on low-income households.
The One-third Principle & SHIF
Section 19(3) of the Employment, 2007 brings to life the one-third principle limiting deductions to a third of an individual’s income.
19(3): “…..the total amount of all deductions which under the provisions of subsection (1), may be made by an employer from the wages of his employee at any one time shall not exceed two-thirds of such wages……”
This principle is meant to protect individuals from excessive financial burdens and deductions that would leave employees financially strained or unable to meet basic living expenses. Although SHIF deductions do not exceed one-third of a person’s salary, they bring many individuals closer to that limit. This is because, when combined with mandatory deductions such as Pay as You Earn (PAYE) and National Social Security Fund (NSSF), the total deductions become quite substantial. This could lead to a significant reduction in the citizens’ disposable income thus less money left for saving, investment and personal needs.
The implementation of SHIF could lead to more difficulty for citizens in accessing credit. This is because, the rise in deductions means that those with existing loans or other essential deductions may need to repay at a lower rate to avoid exceeding the deduction limit, which in turn limits their ability to access future credit. Similarly, many financial institutions often evaluate individuals’ ability to repay loans based on the income they have after deductions. Anyone planning to take out a loan must be cautious not to exceed the permissible deductions.
The overall impact could be devastating as a reduction in overall disposable income, and a strain in accessing credit could mean hindered economic activity and mobility all over the country. This is because, less people possess the ability to maintain a good life, while fewer individuals have the ability to access tangible credit to sustain businesses. Even worse for low income earners is that they could fall deeper into poverty, as many Kenyans live paycheck to paycheck. Inherently, this could widen the gap between the rich and the poor.
How SHIF affects vulnerable individuals
The new Act provides a breather to unsalaried employment households. Under the Act, such a household is to pay an annual contribution at a rate of 2.75% of the household income, as determined by the means test prescribed in the Regulations. While this may be a good thing for such households, it may mean immense difficulty for the tax regulator to determine the income streaming from such households.
For households in need of financial assistance, they are to be paid by the National Government or County Government as prescribed by the Regulations. Similarly, for persons under lawful custody, the Ministry responsible for correctional services is liable as the contributor under SHIA.
Conclusion
The move to SHIF has placed obligations on every Kenyan to contribute towards the fund with the object of meeting the government’s vision of providing sustainable and affordable healthcare to all. On paper, these developments seem to be favorable to vulnerable individuals. However, it remains unclear as to whether the government will, practically, cater for them. While SHIA makes the commendable attempt at reducing the financial burden on lower-income households, this approach still leaves low and middle-income earners, who may not qualify for government assistance, exposed to the full impact of SHA deductions, potentially increasing their risk of exceeding the one third threshold when combined with other deductions.
