The World Bank wants Kenya to increase the top rate of income tax to 38 percent for those earning over Sh800,000 while reducing the burden for mid and low-income earners to boost the formal economy.
The multilateral lender is pushing for the creation of a new tax band for the top earners to fill the hole in the public finances that will be created by reducing the tax rate for all monthly pay below Sh166,677.
It seeks the creation of six tax bands from the current five in a shift that will eliminate the 30 percent tax rate.
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 World Bank plans to ease the pain of workers earning less than Sh480,000 monthly as salary rises continued to lag inflation or cost of living measure 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 social health insurance levy.
The World Bank wants the tax rate for workers earning between Sh24,000 and Sh32,333 reduced to 15 percent from the current 25 percent.
Those earning between Sh32,334 and Sh166, 667 will pay a tax rate of 25 percent from the current 30 percent.
The multilateral lender wants those earning between Sh166,668 and Sh500,000 to pay 32.5 percent from the current 30 percent.
Workers earning between Sh500,000 and Sh800,000 will pay 35 percent in taxes from the current 32.5 percent, and those making above Sh800,000 38 percent from 35 percent, says the World Bank proposal.
“An alternative tax rule with revised structure can reduce the burden on low-income earners while maintaining revenue neutrality by slightly increasing the effective rate for the top decile,” says the report.
This is the fifth year 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 Covid-19 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 fell from Sh62,256 in 2020 to Sh55,451 last year, translating to an erosion of Sh6,805.
Workers' disposable income has shrunk further on additional taxes and levies, including the housing tax and the controversial social health insurance levy.
The affordable housing law requires employers in the formal and informal sectors to deduct 1.5 percent of gross monthly pay to workers and match the contributions towards the housing levy.
The levy sparked an outcry from the opposition and many Kenyans, who feel burdened by the raft of taxes introduced under President William Ruto.
It was implemented nearly at the same time as the health insurance levy, which requires people to contribute 2.75 percent of their monthly salaries towards a social healthcare programme. Contributions to the National Social Security Fund (NSSF) have also been increased twice in under two years.
Thousands of workers have breached the legal requirement that demands they take home at least a third of their salary following multiple cuts on their payslips.
Employers reckon that the workers take home less than a third of their pay when pre-existing loan repayment obligations are accounted for.
The proposed income tax bands, if adopted, would cut the take-home pay of a Kenyan earning Sh1,000,000 per month by Sh12,122.80 to Sh646,804.85.
A Kenyan earning Sh800,000 would see a pay cut of Sh7,325.42 to Sh526,925.25 from Sh534,250.67 currently. The move to tax the rich more is expected to impact less than 10 percent of formal sector employees.
Official data show that 387,418 Kenyans of the 3.1 million formal sector workers earned over Sh100,000 a month, representing a 12.4 percent share.
The majority of formal sector workers earned between Sh50,000 and Sh99,999 a month as of December 2023 at 1.4 million people. Low- and mid-income earners would get a boost if the Treasury adopted the recommendations.
A Kenyan earning Sh50,000 would see their take-home pay rise by Sh179.15 to Sh39,208.30. Workers earning Sh100,000 would see a rise of Sh3,788.15.
The World Bank says low-income earners have been hit the hardest in 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 as the dip from lower taxes on poorer workers is offset by higher taxes on the rich.
Kenya’s tax wedge, the difference between pre-tax and post-tax pay, is assessed as high for a low-income household and relative to peer countries, with the indicator being used to measure the extent to which taxation of labour income discourages formal employment.
“Kenya’s tax wedge of 19 percent is estimated to be higher than in many countries- and is more than double the tax wedge of Austria, the Netherlands and Belgium among others,” the 2025 Public Finance Review report says.
