The Treasury is contemplating eliminating tax reliefs on pay-as-you-earn (PAYE) taxes, which could lead to smaller payslips for salaried employees. This proposal is part of the Treasury’s medium-term revenue strategy to optimize tax collections.
Currently, salaried workers benefit from two types of tax reliefs on PAYE:
- A monthly personal relief of Sh2,400 for all resident individuals, designed to reduce the tax burden on taxpayers.
- A 15 percent relief on insurance premiums for life, health, or education policies for individuals, spouses, or children, capped at Sh60,000 annually. The policies must have a maturity period of at least 10 years to qualify.
Additionally, contributions to the National Hospital Insurance Fund (NHIF) became eligible for insurance relief starting in January of the previous year.
However, the Treasury’s proposal to remove one or all of these tax reliefs has raised concerns among tax experts. They argue that this move would further reduce the disposable income of households, who are already coping with the newly introduced 1.5 percent housing levy and increased deductions to the National Social Security Fund (NSSF).
Francis Kamau, a Partner and Tax Leader at Ernst & Young, emphasized the importance of taxation on households, as it has a ripple effect on purchasing power, company revenues, and ultimately GDP. He pointed out that the economy relies heavily on salaried workers, often considered the middle class.
To mitigate the impact of eliminating tax reliefs, the National Treasury plans to create a new PAYE tax band at zero percent, cushioning low-income tax earners in line with adjusted tax bands.
Simultaneously, the government is considering reducing the top PAYE tax rate from 35 percent to 25 percent for high earners, as part of a broader restructuring of tax bands to combat tax avoidance and evasion.
This proposal follows the introduction of two new tax bands at 32.5 percent and 35 percent in the 2023 Finance Act for monthly employment incomes exceeding Sh500,000 and Sh800,000, respectively. However, experts believe these changes may have limited impact on revenue generation, as the majority of Kenyan employees earn below Sh100,000 per month.
Currently, workers earning up to Sh24,000 per month are exempt from PAYE taxes due to the Sh2,400 personal relief, which matches the 10 percent tax rate on the lowest income band. Higher-income earners face PAYE rates of 25 percent and 30 percent.”
