Local Service Tax: the payroll deduction due by October
Employers in Uganda deduct Local Service Tax from salaries in the first four months of the financial year. The bands, the schedule and how to pay.
Of the deductions an employer makes from a Ugandan salary, Local Service Tax is the one most often forgotten, because it is small, it is annual and it goes to a local authority rather than URA. It is also the one with the shortest window. The Kampala Capital City Authority's guidance says the tax on salaried employees is paid in the first four months of every financial year, which means July to October. If your October payroll has not yet closed, this is your last month to get the current year right.
What Local Service Tax is
KCCA's Local Service Tax FAQ describes it as a legal requirement for any person in gainful employment or business under the Local Governments Act, Cap 243, as amended by the Local Governments (Amendment) (No. 2) Act, 2008, and explains that the tax was introduced to bridge the gap left when graduated tax was abolished. It is levied on the salaries, wages and incomes of persons in gainful employment, the self-employed, practising professionals, artisans and business owners, and it is collected by the local authority. In Kampala that is KCCA, and the proceeds go to roads, drainage, primary health care and other city services.
The bands for employees
KCCA's FAQ reproduces the regulation's table for persons in gainful employment earning a monthly salary. The tax is an annual amount set by the monthly income band:
| Monthly income (UGX) | LST per year (UGX) |
|---|---|
| Over 100,000 up to 200,000 | 5,000 |
| Over 200,000 up to 300,000 | 10,000 |
| Over 300,000 up to 400,000 | 20,000 |
| Over 400,000 up to 500,000 | 30,000 |
| Over 500,000 up to 600,000 | 40,000 |
| Over 600,000 up to 700,000 | 60,000 |
| Over 700,000 up to 800,000 | 70,000 |
| Over 800,000 up to 900,000 | 80,000 |
| Over 900,000 up to 1,000,000 | 90,000 |
| Over 1,000,000 | 100,000 |
An employee earning UGX 1,200,000 a month therefore owes UGX 100,000 for the whole year, which spread over four months is UGX 25,000 in each of July, August, September and October. An employee earning UGX 450,000 owes UGX 30,000, or UGX 7,500 a month over the same four months. From November to June nothing is deducted.
The employer's role
The FAQ sets out what the employer does: submit a salary schedule with the local service tax computation for each employee to the authority for assessment, deduct the tax from salaries, and remit it. Payment can be made by electronic funds transfer through a bank of your choice on obtaining a payment advice form from the Division office or a one-stop shop, or through the mobile money and payment platforms the authority lists.
Two details are worth getting right. First, KCCA's guidance allows the employer to deduct the annual amount in four equal instalments, so the deduction should start in July rather than arrive as a lump sum. Second, LST is computed from the employee's salary band, not from your business turnover, so it is a payroll item rather than a business expense.
Professionals and business owners
The same FAQ covers the other categories. Practising professionals and artisans are assessed once a year, within the first four months, with doctors, pharmacists, veterinary doctors and engineers earning UGX 1,000,000 or more a month paying UGX 100,000 a year, and crafts persons, plumbers and builders starting at UGX 5,000 for incomes just above UGX 100,000 a month. Business owners pay once every twelve months, before being issued with or together with their trading licence, on a turnover scale that reaches UGX 100,000 a year for monthly turnover above UGX 10,000,000. An owner who draws a salary from their own company and also holds the trading licence should check with the Division office that they are not assessed twice.
Exemptions
KCCA lists the salaries exempted from the tax: members of the Uganda People's Defence Forces, the Uganda Police Force, the Uganda Prisons Service, the local defence forces and accredited diplomatic missions. Also exempt are the unemployed and peasants, people in subsistence or occasional economic activity, petty food vendors, boda boda cyclists, sole petty artisans who are not established businesses, and people living in poverty who cannot earn a minimum income. Employees earning UGX 100,000 a month or less fall below the first band.
What to do now
- Pull a list of employees with their monthly gross pay and place each in a band.
- Compare the total against what you have deducted since July. If you started late, the balance of the annual amount should come out of the October payroll.
- Prepare the salary schedule with the LST computation and submit it to your local authority for assessment.
- Obtain the payment advice form, pay, and keep the receipt with your payroll records.
- Put a reminder in your calendar for 1 July 2027 so that next year the deduction starts in the first month.
Local Service Tax will never be the largest line on a payslip. It is, however, a statutory deduction with a fixed window, and an employer who misses the window has to explain to staff why an extra deduction is appearing in November.
Sources
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