So, one fine morning, you walk into the office, open your email and are confronted with a message from the Kenya Revenue Authority (KRA), informing you that you conducted some business and now owe tax on it.
You trying to recall which transaction the taxman is referring to. Then it hits you: a bit of consultancy work you did on the side. A side hustle.
But do you really need to pay tax on it? You remember the client telling you they would withhold some money and remit it to KRA as tax. So why, then, is the taxman still knocking?
Welcome to the world of withholding tax — a form of income tax that KRA says it has used to unearth 392,162 companies and wealthy individuals owing about Sh759.7 billion in unpaid taxes.
The big question, however, is: why would KRA still pursue you for more tax if some of it has already been paid?
To answer that question, it helps to understand how withholding tax works.
What is withholding tax?
Withholding tax in Kenya is a method of collecting income tax at the source, meaning the person or the payer who gave the side hustle deducts a share of the payment (between five and 25 percent) and remits that amount to KRA before paying the balance to the recipient.
Effectively, withholding tax ensures that tax on specified types of income is collected upfront rather than waiting for taxpayers to self-report later. The law requires the payer to compute, deduct and pay the withholding tax to KRA within five working days after deduction.
Once remitted, the payer receives a withholding tax certificate, which documents how much tax has been withheld. This tax, in most cases, counts as an advance payment against the recipient’s annual tax liability. In some cases such as on dividend and interest income, it is treated as final tax.
Which supplies are subject to withholding tax?
Withholding tax in Kenya applies to a wide range of payments or supplies before they are made to the recipient.
Under KRA rules, amounts subject to withholding include professional fees, management and consultancy fees, training fees, contractual fees, and audit and legal fees.
Other common categories include winnings from betting or gaming, performance or entertainment fees, royalties, interest, and dividends.
It also applies to rent on buildings, insurance commissions, natural resource income, and newly introduced digital content monetisation payments.
Not every payment is covered — for example, some exemptions exist for small monthly professional fees below Sh24,000, dividends between resident companies with significant shareholding, and payments to tax-exempt bodies.
Withholding tax helps KRA to collect tax on earnings that might otherwise be harder to track, especially when paid to individuals or entities who may overlook or delay filing returns themselves.
What are the different withholding tax rates?
Withholding tax rates in Kenya vary by type of income and the recipient’s residency status.
For residents, common rates include five percent on management, professional, consultancy and training fees, and 10 percent on dividends, though qualifying dividends paid to resident shareholders may be withheld at 5 percent.
For non-residents, the rates are higher for many categories. For example, it is 20 percent on management, professional and consultancy fees, and 15 percent on dividends.
Interest income earned on loans is also taxed at different rates depending on the debt instrument. It is 15 percent for bank interest, 10 percent on certain housing bond interest, and varied rates for bonds bearers depending on maturity.
These rates are specified in the Income Tax Act and vary to reflect policy goals such as encouraging local investment or taxing foreign-sourced services.
How does the KRA use withholding tax to catch tax cheats?
KRA uses withholding tax as a compliance and enforcement tool because it creates a record of taxable payments and helps track income that may otherwise go unreported. Each deducted and remitted withholding tax is logged through the iTax system, and a certificate is issued to both parties, creating a traceable audit trail.
When taxpayers file annual returns, the withheld amounts are matched against declared incomes. If there are discrepancies or under-declarations, KRA can trigger audits or assessments, making it harder for individuals or businesses to hide income.
Since withholding tax is collected at source, it reduces opportunities for recipients to conceal earnings or delay tax payments, especially for incomes like consultancy fees, rent, interest, and payments from digital platforms. This strengthens overall compliance.
Penalties and interest apply for failure to withhold or remit on time, incentivising compliance and helping KRA deter non-compliance and catch tax cheats.
In which instances is withholding tax final?
In Kenya, withholding tax is not always a final tax — in many cases it serves as an advance payment of the recipient’s income tax liability that is credited when they file annual returns.
However, there are specific situations where withholding tax is treated as final tax. For non-resident persons who have no permanent establishment in Kenya, withholding tax on income paid to them is final, meaning no further income tax is payable on that income in Kenya.
For residents, withholding tax is final only on certain kinds of income, such as winnings from betting and gaming, qualifying interest, qualifying dividends, and pension payouts. In these cases, the tax withheld satisfies the full tax obligation for that income.
In all other instances involving resident taxpayers, withholding tax is not final. This means that the recipient must declare the gross income and withheld tax on their annual return and settle any additional tax due.
For employees doing side hustles, how do you deal with withholding tax?
Employees who earn income outside their regular employment — commonly referred to as side hustles — remain subject to tax obligations in Kenya.
While salary income is taxed under Pay As You Earn (PAYE), additional income from consultancy, professional work, rentals or digital platforms must be declared separately in the individual’s annual tax return.
Where side-hustle income falls under categories subject to withholding tax, such as consultancy or professional fees, the payer is required to deduct tax at the prescribed rate, remit it to the KRA and issue a withholding tax certificate. However, the tax deducted is not automatically the final tax.
When filing annual returns, the individual must first compute the gross side-hustle income, deduct all allowable business expenses incurred in earning that income — such as transport, internet, office costs or professional tools — to arrive at the taxable profit. The applicable income tax is then calculated on that profit, after which the withholding tax already deducted is claimed as a credit against the final tax payable.
Are there instances where you can get back withholding tax?
Yes. In Kenya, withholding tax is often treated as an advance tax payment rather than a final tax, especially for resident taxpayers. When the recipient files their annual income tax return, the amount already withheld can be credited against their overall tax liability.
If the total tax due for the year is less than the amount withheld, the taxpayer may be eligible for a refund of the excess. This often happens when the taxpayer’s effective tax rate is lower than anticipated or when allowable expenses and reliefs reduce the overall tax liability.
