Local service tax: the four payroll instalments explained

October is the last of the four months in which Ugandan employers deduct local service tax (LST) from salaries, so this is a good moment to check the deduction was done correctly and to understand what you are remitting. LST is small per head but it is a legal obligation on the employer, it is paid to a different authority from PAYE and NSSF, and the order in which it interacts with PAYE confuses many payroll clerks.

Where the tax comes from

LST was introduced by the Local Governments (Amendment) (No. 2) Act 2008, which commenced on 7 July 2008. The Act amended section 80 of the Local Governments Act to let local governments levy a local service tax on persons in gainful employment, on professionals, on business persons and on commercial farmers, and inserted a new Part II into the Fifth Schedule setting the rates. Nansana Municipal Council's guidance explains the policy background: the tax replaced revenue lost when graduated tax was abolished, and it funds local services such as roads, drainage and primary health care.

The statutory rate schedule for salaried employees

The Fifth Schedule, as amended, levies LST on persons in gainful employment and earning a monthly take-home salary at a fixed annual amount per band:

Monthly take-home salary (UGX)	LST per year (UGX)
Not exceeding 100,000	Nil
Exceeding 100,000 but not exceeding 200,000	5,000
Exceeding 200,000 but not exceeding 300,000	10,000
Exceeding 300,000 but not exceeding 400,000	20,000
Exceeding 400,000 but not exceeding 500,000	30,000
Exceeding 500,000 but not exceeding 600,000	40,000
Exceeding 600,000 but not exceeding 700,000	60,000
Exceeding 700,000 but not exceeding 800,000	70,000
Exceeding 800,000 but not exceeding 900,000	80,000
Exceeding 900,000 but not exceeding 1,000,000	90,000
Exceeding 1,000,000	100,000

The Schedule defines "take-home salary" as gross salary after deducting income tax in the form of PAYE. Note that some councils publish their own guidance tables that differ from this text, so if your district's schedule looks different, ask the council's revenue office which schedule it applies before you deduct.

Four equal instalments, in the first four months

The Act says salaried employees pay the tax in four equal instalments during the financial year, and that payment is to be completed within the first four months of the financial year, which runs from 1 July to 30 June. In practice employers deduct a quarter of the annual amount in each of the July, August, September and October payrolls and nothing for the remaining eight months. An employee in the top band therefore sees UGX 25,000 deducted in each of those four months.

The tax on salaried employees is collected by the employer and remitted to the local government where the employee resides during the period of employment. Nansana's FAQ describes the mechanics: the employer submits a salary schedule with the LST computation to the council for assessment and deducts at source. Payment can be made through banks and the council's listed payment channels, including mobile money.

Who is exempt

The Act exempts the salaries of members of the Uganda People's Defence Forces, the Uganda Police Force and the Uganda Prisons Service, as well as the unemployed and those unable to earn. Nansana's guidance adds local defence units and members of accredited diplomatic missions, and clarifies that peasants, petty vendors, boda boda riders and petty artisans who are not established businesses are not assessed.

LST and PAYE: which comes first

Here is the part that causes most errors. The Local Governments Act bands employees by take-home pay after PAYE, which suggests PAYE first. But Nansana's FAQ, citing the Income Tax Act, states that for tax administration the Income Tax Act supersedes the Local Governments Act, so LST is deducted from gross income first and the remainder is the base for PAYE. The council's own example takes a salary of UGX 420,000, deducts LST and computes PAYE on the balance. If your payroll system computes PAYE on the full gross in the LST months, you are over-deducting PAYE from staff by a small amount four times a year.

What to check this month

1. Every employee earning more than UGX 100,000 take-home had LST deducted in July, August, September and October, in equal quarters.
2. The annual amount matches the band for that employee, not a flat figure applied to everyone.
3. Remittances went to the council where each employee lives, with the salary schedule attached.
4. PAYE in those four months was computed after the LST deduction.
5. Each payslip shows the deduction and names it, as the Employment Act requires for every deduction.

Done properly, LST is a few lines on the payroll. Done badly, it is an audit from the council plus a PAYE correction with URA.

Sources

1. https://faolex.fao.org/docs/pdf/uga151713.pdf
2. https://nansanamc.go.ug/localServiceTax.html