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Calculate the taxable income and monthly tax based on the given salary, rent, and reliefs.

Accounting

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Here's the solution for question 21:

21. Income Tax Calculation

  • Given Information:

    • Basic salary: Ksh. 15,000 per month
    • Nominal rent: Ksh. 1,250 per month
    • Personal relief: Ksh. 1,056 per month
    • Insurance relief: Ksh. 270 per month
  • Taxable Income Brackets (K£p.a. and Rate Ksh/£):

    • 1-2300: 2
    • 2301-4600: 3
    • 4601-6900: 5
    • 6901-9200: 7
    • 9201-11500: 9
    • 11501 and over: 10
  • Conversion Factor: 1 K£ = 20 Ksh.

  • (a) His taxable income in K£p.a.

  1. Calculate the monthly taxable income in Ksh.

    Taxable income = Basic salary + Nominal rent
    $$
    \text{Monthly Taxable Income} = 15,000 \, \text{Ksh} + 1,250 \, \text{Ksh} = 16,250 \, \text{Ksh}
    $$
    
  2. Convert monthly taxable income to annual taxable income in Ksh.

    $$
    \text{Annual Taxable Income (Ksh)} = 16,250 \, \text{Ksh/month} \times 12 \, \text{months/year} = 195,000 \, \text{Ksh}
    $$
    
  3. Convert annual taxable income from Ksh to K£.

    $$
    \text{Annual Taxable Income (K£)} = \frac{195,000 \, \text{Ksh}}{20 \, \text{Ksh/K£}} = 9,750 \, \text{K£}
    $$
    His taxable income in K£p.a. is $\boxed{\text{9,750 K£}}$.
    
    • (b) The amount of tax he pays per month in Kenya shillings.
  4. Calculate the gross annual tax using the tax brackets.

    *   First bracket (1-2300 K£):
        $$
        \text{Tax}_1 = (2300 - 1 + 1) \, \text{K£} \times 2 \, \text{Ksh/K£} = 2300 \, \text{K£} \times 2 \, \text{Ksh/K£} = 4600 \, \text{Ksh}
        $$
    *   Second bracket (2301-4600 K£):
        $$
        \text{Tax}_2 = (4600 - 2301 + 1) \, \text{K£} \times 3 \, \text{Ksh/K£} = 2300 \, \text{K£} \times 3 \, \text{Ksh/K£} = 6900 \, \text{Ksh}
        $$
    *   Third bracket (4601-6900 K£):
        $$
        \text{Tax}_3 = (6900 - 4601 + 1) \, \text{K£} \times 5 \, \text{Ksh/K£} = 2300 \, \text{K£} \times 5 \, \text{Ksh/K£} = 11500 \, \text{Ksh}
        $$
    *   Fourth bracket (6901-9200 K£):
        $$
        \text{Tax}_4 = (9200 - 6901 + 1) \, \text{K£} \times 7 \, \text{Ksh/K£} = 2300 \, \text{K£} \times 7 \, \text{Ksh/K£} = 16100 \, \text{Ksh}
        $$
    *   Fifth bracket (9201-11500 K£):
        Mr. Ochieng's annual taxable income is 9,750 K£. This falls into the fifth bracket.
        The amount in this bracket to be taxed is $9750 - 9200 = 550 \, \text{K£}$.
        $$
        \text{Tax}_5 = 550 \, \text{K£} \times 9 \, \text{Ksh/K£} = 4950 \, \text{Ksh}
        $$
    
  5. Calculate the total gross annual tax.

    $$
    \text{Gross Annual Tax} = \text{Tax}_1 + \text{Tax}_2 + \text{Tax}_3 + \text{Tax}_4 + \text{Tax}_5
    $$
    $$
    \text{Gross Annual Tax} = 4600 + 6900 + 11500 + 16100 + 4950 = 44050 \, \text{Ksh}
    $$
    
  6. Calculate the total annual relief.

    $$
    \text{Total Annual Relief} = (\text{Personal Relief} + \text{Insurance Relief}) \times 12
    $$
    $$
    \text{Total Annual Relief} = (1056 \, \text{Ksh/month} + 270 \, \text{Ksh/month}) \times 12 \, \text{months/year}
    $$
    $$
    \text{Total Annual Relief} = 1326 \, \text{Ksh/month} \times 12 \, \text{months/year} = 15912 \, \text{Ksh}
    $$
    
  7. Calculate the net annual tax.

    $$
    \text{Net Annual Tax} = \text{Gross Annual Tax} - \text{Total Annual Relief}
    $$
    $$
    \text{Net Annual Tax} = 44050 \, \text{Ksh} - 15912 \, \text{Ksh} = 28138 \, \text{Ksh}
    $$
    
  8. Calculate the net monthly tax.

    $$
    \text{Net Monthly Tax} = \frac{\text{Net Annual Tax}}{12}
    $$
    $$
    \text{Net Monthly Tax} = \frac{28138 \, \text{Ksh}}{12} \approx 2344.83 \, \text{Ksh}
    $$
    The amount of tax he pays per month is $\boxed{\text{2344.83 Ksh}}$.
    
    • (c) His net monthly salary in shillings.
  9. Calculate the gross monthly income.

    $$
    \text{Gross Monthly Income} = \text{Basic Salary} + \text{Nominal Rent}
    $$
    $$
    \text{Gross Monthly Income} = 15,000 \, \text{Ksh} + 1,250 \, \text{Ksh} = 16,250 \, \text{Ksh}
    $$
    
  10. Calculate the net monthly salary.

    $$
    \text{Net Monthly Salary} = \text{Gross Monthly Income} - \text{Net Monthly Tax}
    $$
    $$
    \text{Net Monthly Salary} = 16,250 \, \text{Ksh} - 2344.83 \, \text{Ksh} = 13905.17 \, \text{Ksh}
    $$
    His net monthly salary is $\boxed{\text{13905.17 Ksh}}$.
    
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