Tax-free income is set to increase from the current Sh24,000 as the State seeks to cut the top taxation rate in a review that places Kenya at odds with the World Bank.
The National Assembly’s Finance and National Planning Committee aims to review the current five tax bands in the 2026 Finance Bill, as lawmakers seek to reduce the burden on top and low-income earners to boost the formal economy.
The committee, which is key in reshaping the Finance Bill, wants to increase the monthly pay that attracts tax and reduce the top rate of income tax from the current 35 percent.
Currently, workers earning above Sh500,000 a month pay 32.5 percent in income taxes, and those making above Sh800,000 pay a top rate of 35 percent.
The push to lower the top tax rates emerges at a time when the World Bank wants Kenya to increase the top rate of income tax to 38 percent for those earning over Sh800,000.
The multilateral lenders also want the tax rate for workers earning between Sh24,000 and Sh32,333 reduced to 15 percent from the current 25 percent.
Salary rises continued to lag inflation or cost-of-living measures for the fifth year in a row, weakening workers’ purchasing power and their standards of living.
Workers’ disposable income has shrunk further on additional taxes and levies, including the housing tax and the controversial healthcare insurance levy.
“I think you can expect the new Paye (pay as you earn bands) to reflect the new realities, for instance, the tax-free threshold of Sh24,000 is low and can be increased so we can have a larger bracket of beneficiaries,” said Kuria Kimani, the Chairperson of the Finance and National Planning Committee.
“We all agree that it is very important that we review the Paye bands.”
Kenya’s medium-term revenue strategy (MTRS) for three years to June 2027 sought to review the personal income tax band, cut tax exemptions and lower corporation tax to 25 percent from the current 30 percent.
Mr Kuria reckons that the top tax rate must match the corporate tax, suggesting it should be lowered below the 35 percent mark.
“If you reduce the corporate tax rate, then you must reduce the upper Paye band because, for an individual, they would rather be paid as a company than an employee,” added Kuria Kimani.
“The politics of reducing the top tax band is that some critics will feel that Members of Parliament are reducing their tax liability.”
The government did not impose major new taxes or increase existing ones in this year’s budget proposals after deadly protests broke out last year against the government’s measures to raise revenue.
Therefore, the Treasury has been hesitant to review the tax bands and cut the corporate tax rate, delaying implementation of parts of MTRS that would hurt revenues.
Payroll taxes grew 12.1 percent to Sh554.6 billion for the year ended June.
It accounted for 22.5 percent of all taxes, and was larger than other tax heads, including corporation tax, value-added tax (VAT), excise duty and import duty.
The World Bank says low-income earners have been hit the hardest by the difference between before-tax and after-tax wages.
The lender’s analysis notes that lowly paid Kenyans carry a heavier tax burden as a percentage of total wages, hence discouraging formalisation, where low-income employees shy away from taking jobs in the formal sector.
“What we find is that there is a distortion in the labour market, especially for the low-income earners, where the tax band is relatively high compared to higher income earners,” said Marek Hanusch, a Lead Economist at the World Bank in Kenya.
“What we argue in the report is that when you adjust the overall income tax in a way that becomes progressive, you would increase the incentive to formalise, which gives you additional revenues.”
The World Bank says the proposed adjustment to the income tax rates is expected to be revenue-neutral, arguing the dip from lower taxes on poorer workers could be offset by higher taxes on the rich.
At least 312,018 workers in the formal sector earned below Sh30,000, accounting for 10 percent of the 3.1 million employed in government and companies.
Last year was the fifth in a row that workers have endured falling real wages, including a negative 4.1 percent in 2023.
The renewed squeeze on Kenyans’ living standards came in a year when the economy grew at the slowest pace since the Coronavirus pandemic four years ago, hobbled by floods that damaged crops, costly bank loans and disruptions that followed anti-government protests against the Finance Bill.
The average monthly real pay has fallen from Sh62,256 in 2020 to Sh55,451 last year, translating to an erosion of Sh6,805.
