Households to be hit despite soft tax punch

As Kenyans marked Labour Day on May 1, there were growing concerns as most salaried workers said they were taking home less than a third of their net salaries.

This was occasioned by the new statutory deductions that President William Ruto’s administration had effected, with experts saying this was in contravention of local and international labour laws.

Kenyan workers have been hit by a number of payslip deductions that have cut their take-home pay since last year, amid job cuts and a rise in commodity prices that have combined to hurt households.

This has not been matched by a corresponding rise in incomes, exposing consumers to shrinking purchasing power.

Under Kenya's employment laws, an employer cannot deduct more than two-thirds of an employee's basic pay in a single month, a rule designed to protect employees by ensuring they have sufficient income for basic needs.

The push for increased disposable income has been up on the agenda as the government looks to kickstart new revenue raising measures beginning July 1.

Annually, with the passage of a Finance Bill, taxpayers typically brace for a decrease in disposable income due to new taxes, levies and increased compliance costs.

This year, Treasury CS John Mbadi seemingly sought to turn away from what his predecessor went through after tax proposals were thrown out.

Streamlining its implementation, the Bill adopts a cohesive rollout, with nearly all provisions taking effect at the same time, save for Advance Pricing Agreements (APAs) and penalty waivers for electronic tax errors, which were postponed to January 1, 2026.

"Mr Speaker, no life should be lost and no property should be destroyed again,” Mbadi said during his budget speech.

"The message from Kenyans was clear. Instead of additional tax burdens, the 2025 Finance Bill proposes to raise Sh30 billion in revenue through reforms, improved compliance and rationalisation of tax incentives."

However, unlike the past years, where the state set three effective dates for the adoption of new taxation measures, the upcoming financial year will only have two. 

Finance Act 2025 doesn't have any provisions slated for September 1 as the effective date. There are only two provisions set to take effect on Jan 1, 2026. All the remaining 57 clauses are effective July 1, 2025.

“Kenyans complained about high taxation. Therefore, we were very cautious as a government to ensure we didn’t introduce unreasonable taxes that would again overburden Kenyans,” Mbadi said.

In previous years, July 1 marked the commencement of direct taxes and a direct impact on Kenyans pay slips.

With the new approach, it seems the impact on payslips will be due to indirect tax implications.

The act, which targets to streamline tax administration and increase revenue collection, has introduced key amendments to Income Tax Act, the Stamp Duty Act, the Excise Duty Act, Tax Procedures Act, and Value Added Tax Act.

These are expected to sustain revenue collection for the fiscal year 2025-26.

Starting tomorrow (Tuesday 1), private sector employees are set to benefit from a significant increase in tax-free daily allowances, following a proposed change that will raise the per diem exemption from Sh2,000 to Sh10,000.

The adjustment is among the first to be implemented in the latest round of tax policy proposals, to align the private sector with existing public sector per diem limits.

Clifford Otieno, an independent tax analyst, says the measure would mark a major step toward harmonising tax treatment of employees across both sectors.

“This was also on the Tax Laws Amendment Act 2024, which raised the annual limit for tax-exempt non-cash benefits granted to employees to Sh60,000 from Sh36,000,” he said.

Policy experts view this development as part of a broader effort by the government to modernise and streamline tax laws affecting workers.

“The move appears to be in recognition of evolving cost realities and the need for parity between public and private sector employees,” the Nairobi-based tax analyst said.

This change significantly enhances the non-taxable compensation employees can receive for work-related travel.

“It also reflects a gradual shift by policymakers toward incentivising employee welfare through more generous and equitable tax treatment,” he said.

The proposed increase could see employees who travel for work or are required to spend time away from their primary duty stations retain more of their daily allowances without additional tax burdens.

It is expected to benefit mid- and senior high-level professionals across various industries, particularly in consultancy, engineering, sales and development work.

 The Act also proposes several changes that carry significant implications for access to health and affordability.

According to AAR CEO Justine Kosgei, limiting tax loss carry-forwards to five years.

This measure will strain insurers that rely on longer-term loss recovery to sustain affordable health plans.

“The Finance Bill 2025 offers a chance to strengthen public financing and can be implemented in a way that does not undermine affordability, innovation, or trust in healthcare,” said Justine Kosgei while commenting on how the 2025 finance Bill will impact healthcare.

Bajeti Hub executive director Abraham Rugo acknowledges that additional funding for the Primary Healthcare Fund and the Emergency and Critical Illness Fund in Health is a positive move, strengthening SHIF’s resource base.

Yet, he points out that the measures put in place don't adequately address the issues, like how the gap from donor-funded projects will be filled.

"Concerns remain over the lack of extra funds for the National AIDS Control Programme, especially after the US Government’s stop-work order exposed a Sh9.4 billion HIV budget shortfall," Rugo said.

Among the other financial implications Kenyans are staring at beginning Tuesday is the amendments made to the Income Tax Act, which now mandates employers to apply all applicable reliefs, deductions and exemptions to an employee automatically, as provided by law.

The implications of this will include a legal obligation for employers to incorporate deductions such as pension contributions, insurance relief, personal relief and disability relief into payrolls.

This results in improved employee take-home pay due to the immediate application of tax reliefs, reduces the need for refunds and lowers the administrative burden on KRA by decreasing the number of refund claims.

The government is proposing to reinstate limited powers to the National Treasury CS, allowing them to waive penalties and interest charges that arise from errors or malfunctions in electronic tax systems.

The move marks a significant policy shift from the position adopted in the Finance Act 2023, which removed the Treasury’s authority to waive such charges amid growing concerns about abuse of discretion and lack of transparency.

“The Cabinet Secretary may, on the recommendation of the commissioner, waive the whole or part of any penalty or interest imposed under this Act, where the liability to pay the penalty or interest was due to- an error generated by an electronic tax system, a delay in the updating of an electronic system,” reads the Act.

However, tax experts had noted that the absence of this waiver mechanism has posed serious challenges for taxpayers, particularly in cases where penalties stem from technical failures beyond their control.

One puzzling detail in the proposed amendment is the delayed effective date. The provision is set to take effect on January 1, 2026, six months after the start of the 2025-26 fiscal year.

Observers are questioning why the change isn't being implemented earlier, potentially as soon as July 1, to offer immediate relief.

Amendments to Value Added Tax (VAT) structure could see consumers bear increased costs on a range of essential and industrial goods.

In a fresh round of tax policy adjustments, the government seeks to remove several items from the VAT Zero-Rated Schedule and reclassify them as VAT Exempt.

Among the affected items are inputs or raw materials (locally sourced or imported) used by pharmaceutical manufacturers to produce medicaments, transportation of sugarcane from farms to milling factories, locally assembled and manufactured mobile phones, electric bicycles, solar and lithium-ion batteries and Inputs for the manufacture of animal feeds.

While both zero-rated and exempt goods are not taxed at the point of sale, the crucial difference lies in how producers handle VAT on inputs.

Zero-rated suppliers can claim a refund for VAT paid on raw materials and production costs, keeping final prices lower.

Exempt suppliers, on the other hand, cannot recover VAT paid on inputs, which means those costs are typically passed down to consumers.

"This shift from zero-rating to exemption will likely lead to increased prices in sectors where affordability and access are already sensitive issues," Otieno said. "It’s effectively an indirect tax on consumers."

The proposal marks a significant policy reversal, echoing past attempts to tax sectors like electric mobility and animal feed production, moves that were shelved after public and industry pushback.

For instance, similar efforts to standard-rate VAT on electric bicycles, lithium batteries and animal feed ingredients have previously been withdrawn amid concerns over inflationary pressure and disruption to emerging industries.

The government, however, appears determined to clean up and streamline the VAT regime as it seeks to boost domestic revenue and reduce refund obligations.

The proposal may also be aimed at curbing what Treasury views as abuse of zero-rating provisions, which have sometimes been linked to fraudulent refund claims.

Still, analysts warn that removing input VAT claims for local manufacturers could undermine the competitiveness of key sectors, including agriculture, renewable energy and pharmaceuticals.