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A guide on how to calculate tax on employment income using new rates

The tax rates for withholding tax on employment income have recently been updated and are expected to significantly impact net income. This change follows the effectiveness of the law provision within Law No. 027/2022 of 20/10/2022, which establishes taxes on income.

This tax is withheld on employment income such as wages, salary, leave pay, commissions, bonuses, and gratuity, as well as other payments made in respect of previous, current, or future employment.

According to Article 56, for the first year following the commencement of this law, the tax rates were as follows: 0% for income between 0 - 60,000 Frw, 20% for 60,001 - 100,000 Frw, and 30% for income of 100,001 Frw and more.

However, provisions for the second year introduce new tax rates: 0% between 0 - 60,000 Frw, 10% between 60,001 - 100,000 Frw, 20% between 100,001 - 200,000 Frw, and 30% for 200,001 Frw and more.

As of November, the new rates have come into effect, including a special rate of fifteen percent for tax on income from casual labor.

How the New Rates Will Be Implemented

Let's consider an example of someone earning a monthly income of Frw 100,000. Under the new rates, they fall into two categories: 0% and 10% tax rate. 

Initially, the formula considered the first category of Frw 60,000, which is taxable at 0%, and the remaining Frw 40,000 taxed at 20% (resulting in Frw 8,000 of tax). 

The new formula, however, places the remaining Frw 40,000 in the 10% category, resulting in a tax of Frw 4,000. This means the net income will have an addition of Frw 4,000, as the government has spared part of the initial tax amount.

Taking another example of someone earning a monthly income of Frw 310,000, this individual falls into all tax categories (0%, 10%, 20%, 30%), resulting in a total withheld income tax of Frw 57,000. This marks a notable reduction, as using the previous rates until last month, this employee would have paid Frw 71,000, equal to the bonus of Frw 14,000 added to the net income tax.

This decision has been received as good news for employees. Last year, the taxable amount of 0% was raised from Frw 30,000 to Frw 60,000, a move commended by Biraboneye Africain, Rwanda’s Workers' Trade Union (CESTRAR) Secretary-General. 

"These new rates will complement efforts to raise the net income for employees. Although the change is not huge, any addition is a good one. This is a timely move as the cost of living is becoming more expensive, and it will ease the burden on the side of employees," he emphasized. 

He commended all these changes, recognizing their wider impact on both public and private servants.

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