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The easing of Kenya’s formal employees’ tax burden long overdue
Clients seek services at KRA headquarters in Nairobi on February 23, 2024. A balanced approach through tax base expansion is crucial to foster equitable contributions and sustainable growth.
In his remarks at the Institute of Certified Public Accountants of Kenya conference in November 2024, Treasury Cabinet Secretary John Mbadi suggested that the government may lower Pay As You Earn (PAYE) rates for employees within the next two years.
This follows growing concerns over Kenya’s high tax burden on formal employees. The Business Daily headline of November 21, 2024, aptly captured the dilemma: Housing Levy, SHIF Slash Take-Home Pay to 55pc.
Formal employees in Kenya have long shouldered a disproportionately high tax burden, a trend overdue for correction. In the 2023/2024 fiscal year, the Kenya Revenue Authority (KRA) collected Sh2.407 trillion in tax revenue, with PAYE contributing Sh543.186 billion—22.56 percent of total revenue.
The previous year saw PAYE generate Sh494.9 billion, accounting for 24.1 percent of tax revenue. Between 2019 and 2024, individuals consistently contributed an average of 24.3 percent to the national tax basket, compared to 21 percent from corporate tax and 26 percent from Value Added Tax (VAT).
What makes this imbalance striking is the composition of Kenya’s workforce. Formal employment accounts for just 15 percent of the national labour force—approximately three million out of 20 million workers.
This means that a small segment of the population contributes significantly to the tax revenue while representing only six percent of Kenya’s total population.
Beyond PAYE, formal employees face additional indirect taxes, such as VAT, excise duty, and customs duty, further diminishing their disposable income. VAT, in particular, disproportionately impacts consumers, who cannot claim credits or refunds, unlike businesses.
Recent policy changes exacerbate this strain: the Affordable Housing Levy deducts 1.5 percent of gross salaries, the Social Health Insurance Fund (SHIF) takes 2.75 percent, and enhanced National Social Security Fund (NSSF) contributions also apply.
Even after these statutory deductions, many employees must pay privately for essential services like healthcare, security, education, and retirement savings.
This reflects systemic inefficiencies in public service delivery, compelling individuals to bear costs that governments ideally should manage.
The reliance on formal employees for tax revenue stems from ease of collection—employers deduct and remit taxes directly to avoid sanctions. However, this efficiency has led to over-taxation of a narrow base, neglecting broader equity principles.
The government’s Medium-Term Revenue Strategy aims to increase Kenya’s tax-to-GDP ratio to 25 percent by 2030, up from the current 14.1 percent.
While raising this ratio is vital to reduce reliance on debt for financing, the current over-reliance on PAYE is unsustainable.
Policymakers must urgently address this imbalance by expanding the tax base to include untapped income streams in informal and corporate sectors, while providing relief to overburdened formal employees.
The ease of taxing formal employees should not breed complacency. A balanced approach is essential to foster equitable contributions and sustainable growth.
The writer is the Founding & Managing Partner at Mukiti Advocates LLP
