Bankers seek PAYE reforms in Kenya to shore up incomes

• Bankers lobby for tax and PAYE reforms in Kenya to help restore household income, stimulate spending, and support businesses in a tough economy.
• Proposal seeks to raise the tax-free income limit from KES24,000 to KES30,000 and set the top rate at 30%.
• The move is in response to the 10.7% real wage decline that the Parliamentary Budget Office’s 2025 report pointed out.

The Kenya Bankers Association (KBA) has proposed a major change to the Pay As You Earn (PAYE) tax structure in a bold attempt to boost Kenya’s economy. They want to raise the tax-free income limit from KES24,000 to KES30,000 and set the top rate at 30 per cent.

This ten-point plan, which was submitted during talks for the 2026 Finance Bill, aims to broaden the tax base by adding progressive bands: 15 per cent on income from KES30,001 to KES50,000; 20 per cent on KES50,001 to KES100,000; 25 per cent on KES100,001 to KES400,000; and 30 per cent on KES400,000 and above.

Raimond Molenje, the CEO of KBA, says that this change will “restore household income, stimulate spending, and support businesses.” The proposal is in response to the 10.7 per cent real wage decline that the Parliamentary Budget Office’s 2025 report pointed out.

KBA’s proposal also aims to improve cash flow by moving the deadline for withholding tax and VAT payments to the 5th of the following month arguing that this could give the economy a boost as it deals with inflation and stagnant wages.

“According to the Total Tax Contribution report by KBA, on average, three fulltime employees were engaged in tax compliance functions, at an estimated annual cost of KES13.5 million per bank. Beyond regular staffing, each bank surveyed incurred an additional KES1.9 milion on average to hire extra personnel dedicated specifically to tax compliance. For those that engaged external consultants, the average annual cost stood at KES3.8 million. These figures underscore the substantial internal and external resources now directed toward managing tax obligations. This in our view is contrary to the design of a fair tax code which should not impose punitive compliance burdens on taxpayers,” KBA stated.

PAYE reforms in Kenya aims at increasing take-homes for individuals

The KBA’s plan could change the game for Kenya’s salaried workers by directly raising their take-home pay and easing financial stress in a high-cost environment. The current Finance Act 2023 says that PAYE starts at 10 per cent on the first KES24,000 and goes up to 35 per cent on income over KES800,000.

These PAYE bands are in addition to other taxes such as the 1.5 per cent Affordable Housing Levy and the 2.75 per cent Social Health Insurance Fund contribution. What happened? According to KBA, a middle-class person who makes KES50,000 a month could see their net pay go down by 20–25 per cent. If the tax-free limit were raised to KES30,000, it could give these families KES5,000 to KES7,000 more each month, which would encourage them to buy more basic goods and services and boost consumer demand.

This help comes at the right time: the Kenya National Bureau of Statistics (KNBS) 2025 data shows that household spending stayed the same at 3.2 per cent growth while inflation was 6.5 per cent, which made it harder to buy things. The extra money means that people can better afford education, healthcare, and savings. This could lower the number of people who default on loans by 15 per cent, as Molenje suggests.

A World Bank report from 2025 on East African economies says that similar tax breaks in Uganda raised disposable incomes by 12 per cent, which led to a 5 per cent rise in retail spending. This could help break the cycle of poverty in Kenya, where 60 per cent of urban households live paycheck to paycheck (Afrobarometer, 2025). It would give families the freedom to invest in skills or small businesses, which would indirectly boost economic mobility.

Giving MSMEs More Power: Better Cash Flow and Business Viability

Micro, small, and medium-sized businesses (MSMEs) make up 80 per cent of Kenya’s workforce and account for 40 per cent of the country’s GDP (KNBS, 2025). They will benefit greatly from KBA’s longer tax payment deadlines. Strict deadlines are putting a strain on cash flows right now, with 45 per cent of MSMEs saying they have trouble getting money (Central Bank of Kenya, 2025 SME Finance Survey).

According to KBA estimates, extending to the 5th of the following month could free up KES50–100 billion in working capital each year. This would let businesses buy more inventory, pay their employees, or grow.

For MSMEs, this means staying alive and growing. The survey says that 35 per cent of small businesses delay paying their suppliers because of taxes, which could hurt their credit scores. If they had more money coming in, they could hire more people, which would increase employment by 10–15 per cent in fields like retail (ILO, 2025 Kenya Labor Report).

Molenje’s goal of “encouraging savings and investment” looks in sync with the African Development Bank’s 2025 report, which found that relaxed tax policies in Rwanda led to a 22 per cent increase in MSME investments and the creation of 50,000 jobs. In Kenya, where MSMEs have an 18 per cent chance of getting a loan (CBK, 2025), better finances could make them more trustworthy and open up KES200 billion in lending, the World Bank notes.

A Growth Driven by Consumption: A Win-Win for Government Revenue

KBA’s plan isn’t just good for the economy; it also makes sense from a business point of view, since it would lead to more government revenue through more spending and investment. According to KBA models, workers could spend an extra KES300 billion a year by raising disposable incomes. This would increase VAT collections by 8–10 per cent. The Parliamentary Budget Office agrees: wage relief in 2025 could bring in KES50 billion in indirect taxes because it would boost demand.

This is backed up by real-world data: the 2023 PAYE changes in Uganda brought in 12 per cent more money by encouraging more spending (IMF, 2025 East Africa Fiscal Report). This could add 0.5–1 per cent to growth in Kenya, where consumption makes up 70 per cent of GDP (KNBS, 2025). Some people say it helps the middle class, but KBA says that a bigger tax base—potentially adding 500,000 payers—makes it fair, and the 30 per cent cap keeps high earners from leaving.

Problems and Things to Think About: Fairness in Relief

While the proposal looks good, it has some problems. Fiscal conservatives say that it will cause a KES 100 billion revenue shortfall (Treasury estimates, 2025), which means that spending will have to be cut. There are equity issues because low-income workers who make less than KES30,000 (40 per cent of the workforce, KNBS 2025) don’t see much of a benefit, which could make inequality worse. A 2025 PwC tax report says that implementation risks, like spikes in evasion, could make benefits less useful.

But the plan’s focus on formalization—promoting digital payments—could bring in 15 per cent more people, making up for losses (CBK, 2025). KBA’s vision could change the way taxes work in Kenya, making the economy more dynamic, now that public consultations are open.

Read also: Kenya unveils plan to help MSMEs meet international export standards

($1=KES129)