Income Tax in Uganda - Tips to Save Money on Your Taxes
17 Dec 2023
14 min read
Tax Planning is an exercise undertaken to minimize tax liability through the best use of all available allowances, deductions, exclusions, exemptions to reduce tax.
If you are an employer or an employee in Uganda, you may be looking for ways to lower your tax burden and increase your savings. One of the ways to do that is to make use of the tax exemptions and deductions that are available for certain benefits that you provide or receive as part of your employment contract. In this blog post, we will discuss some of the most common payroll tax planning issues in Uganda and how you can benefit from them.
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Top 12 Proven Ways to reduce Taxes as an employer or employee in Uganda
TIP #1: Filing of Tax Returns
Filing of income tax returns and paying all taxes due by the due dates enables a taxpayer to minimize penalties that would arise on late filing of returns or late payment of tax
Additionally, filing tax returns on time can reduce the risk of default assessments, tax audits and disputes.
TIP #2: Medical Expeses
If you provide medical insurance e.g. AAR, ICEA etc or re-imburse medical expenses for your employees, the tax law allows you to deduct the cost of the insurance or re-imbursement from your taxable income.
Likewise, if you are an employee and receive medical insurance or reimbursement from your employer, the value of the benefit is excluded from your gross income, as long as the expenses are for yourself, your spouse, or your dependents. This way, you can save money on your income tax and also protect your health.
TIP #3: Meals / Refreshments
If you provide meals or refreshments for your employees on your business premises, you can deduct the cost of the food and beverages from your taxable income.
Similarly, if you are an employee and receive meals or refreshments from your employer on the business premises, you can exclude the value of the benefit from your gross income. However, this exclusion only applies if the meals or refreshments are provided to all full-time employees on equal basis and are not lavish or extravagant.
TIP #4: Retirement Fund
If you provide a retirement fund for your employees, such as NSSF, you can deduct the contributions you make to the fund from your taxable income.
Likewise, if you are an employee and contribute to a retirement fund provided by your employer (registered under an Act of Parliament), you can exclude the contributions from your gross income, up to 5%. This way, you can save money on your income tax and also build up your retirement savings.
TIP #5: Official Employment Expenditure
If you incur any expenses related to your official duties, such as travel, entertainment, meals etc., you may be able to deduct them from your taxable income.
However, you have to meet certain conditions and keep proper records to claim this deduction. In addition, the expenses have to be ordinary and necessary for your job, not private / domestic in nature. The expenses should be reimbursable by your employer under the terms and conditions of your employment.
TIP #6: Loans and Advances
In regard to loans and advances the employer lender and employee borrower should consider the interest rate and the repayment period of the loan or advance is question.
According to the Income Tax Act of Uganda, any loan or advance given by an employer to an employee is treated as a taxable benefit in kind, unless the interest rate charged on the loan is equal to or higher than the Bank of Uganda discount rate, or the loan is repaid within three months.
Therefore, to avoid paying tax on the loan or advance, the employee and employer should either agree on an interest rate that meets or exceeds the Bank of Uganda discount rate, or ensure that the loan is repaid within three months of receiving it.
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TIP #7: Terminal Benefits
If you provide terminal benefits for your employees who retire or leave your service due to death or disability, such as gratuity, you can deduct the cost of the benefits from your taxable income.
However, if you are an employee and receive terminal benefits from your employer due to retirement or termination of service, you may have to include part or all of the value of the benefit in your gross income.
TIP #8: Private use of a Motor vehicle
In regard to private use of a motor vehicle, the employer and employee are encouraged to keep a logbook of the vehicle usage. A logbook is a record of the kilometers traveled by the vehicle, the purpose of each trip, the date and time of the trip, and the name of the driver.
A logbook can help to distinguish between business and private use of the vehicle, and to allocate the appropriate amount of income tax to the employee arising out of use of the motor vehicle for private purposes.
In Uganda, the value of the benefit forms part of the employee chargeable income. However, if the employer can prove that the vehicle is used for business purposes the benefit-in-kind does not arise. Therefore, keeping a logbook can help to reduce the tax liability for both the employer and the employee.
TIP #9: Local Service Tax
All taxes including local service tax are sound unattractive to a taxpayer. On the flip side, If you pay local service tax for your employees, such as a tax levied by a city or county for providing services like police protection or garbage collection, you can deduct the tax from your taxable income.
However, if you are an employee and receive local service tax paid by your employer on your behalf, you have to include the value of the benefit in your gross income.
TIP #10: Shares
If you provide shares or stock options for your employees, you may be able to deduct the cost of the shares or options from your taxable income.
However, if you are an employee and receive shares or stock options from your employer, you may have to include the value of the benefit in your gross income, depending on when and how you exercise or sell the shares or options. Therefore, it is important to consult with a tax professional before accepting this benefit.
TIP #11: Life Insurance
If you provide life insurance for your employees, you can deduct the premiums you pay for the insurance from your taxable income.
However, if you are an employee and receive life insurance from your employer, you may have to include the value of the benefit in your gross income, depending on the type and amount of the coverage. Therefore, it is important to check with your employer or a tax professional before accepting this benefit.
TIP #12: Pension
If you provide a pension plan for your employees, you can deduct the contributions you make to the plan from your taxable income, up to a limit of 30% of your gross income or UGX 20 million, whichever is lower.
Similarly, if you are an employee and contribute to a pension plan, you can exclude the contributions from your gross income, up to the same limit. This way, you can save money on your income tax and also secure your retirement income.
About the Writer
CPA Innocent MUGISHA
CPA Innocent Mugisha is a Professor of Finance and Accounting with over 10 years experience in teaching Accounting and Finance related courses including Financial Accounting both at University and Professional level. His qualifications are: PhD (candidate), MBA(Finance), CPA(U), FCCA, CIPS, CTA and BCOM (Accounting). Innocent has also published various books on most topics in Accounting and Finance for Business and Professional Studies.
