Salaried workers with a gross pay of over Sh32,333 a month will pocket an additional Sh2,083 each, as the National Treasury moves amendments to the pay-as-you-earn (PAYE) bands, extending relief beyond low-income workers.
The National Treasury has said it will not change the higher tax bands for those earning more than Sh32,333 but will end the Sh2,400 monthly personal reliefs across all salary levels.
In the proposed changes to be tabled in Parliament next week, all salaried workers will benefit from a preferential tax-free treatment of their first Sh32,333 in gross earnings.
Currently, earnings between Sh24,001 and Sh32,333 are subject to 25 percent tax. The first batch of Sh24,000 in pay is taxed at 10 percent, which is offset by the Sh2,400 a month personal relief.
Under new proposals, both the 10 percent and 25 percent bands will be eliminated along with the personal relief, lifting the first tax band to earnings above Sh32,333.
All salaried workers above Sh32,333 will subsequently see a bump in take-home pay even after the withdrawal of personal relief.
The take-home pay for persons earning Sh50,000 will rise to Sh41,112 from Sh39,029 currently, while net pay for earners of Sh100,000 will jump to Sh72,574 from Sh70,441 at present.
PAYE rates on subsequent earnings above Sh32,333 will continue at graduated rates of 30percent, 32.5 percent and 35 percent for earnings above Sh800,000.
The Treasury had previously hinted at amending the tax bands to have higher earners offset the loss of revenues from the relief passed to low-income workers.
The exchequer is expected to lose at least Sh3.7 billion in payroll taxes a month but expects the loss to serve as a stimulus in the economy, increasing households’ disposable income and resulting in higher consumption and job creation.
“Everybody will get relief, including those earning Sh1 million. It was not practical to restrict the benefit to salaried workers earning Sh32,333 and below as this would leave out other low-income workers like those grossing Sh33,000 or Sh34,000,” John Mbadi, the National Treasury Cabinet Secretary, told the Business Daily on Wednesday.
“We are only dealing with the lower band while we find the personal relief to no longer be tenable.”
An estimated 362,846 more salaried workers will be exempted from paying payroll taxes, adding to the current 1.32 million workers who gross Sh24,000 or less.
This will see the number of salaried workers not paying payroll taxes rise to 1.69 million, while the remaining number of taxpayers will be 1.77 million.
The 1.77 million workers paying payroll taxes will each see their net take-home pay bumped up by Sh2,083, translating to a stimulus of Sh3.7 billion a month or Sh44.4 billion a year.
The passing of a blanket relief to take-home pay across the board, touching on all 3.46 million salaried workers is set to be a welcome move to stakeholders, including civil society groups and lobbies who viewed a broad PAYE review as a stimulus to the economy.
Estimates by the banking industry lobby-the Kenya Bankers Association (KBA), for instance show a five percent PAYE cut would expand the economy, create jobs and increase tax revenues indirectly.
A uniform five percent reduction in PAYE across all income bands is expected to release Sh28.1 billion into the economy annually, generating Sh42 billion in immediate GDP output and supporting over 36,000 jobs.
KBA further estimated the unlocking of Sh140 billion in formal lending capacity and the generation of between Sh27.1 billion and Sh31.5 billion in additional tax revenues, recovering revenue loss caused by the PAYE reduction in the first year.
The higher take-home pay is expected to result in a stronger economy, increasing household spending, raising the demand for goods and services, and boosting SME growth and manufacturing expansion.
Increased disposable incomes are also seen to improve savings and investments and improve credit uptake and lending activity.
“I signed off the proposal yesterday, and it is likely to go to Parliament next week,” Mr Mbadi said.
The easing of payroll taxes comes as the State seeks to placate the electorate with just months to the August 2027 General Elections.
President William Ruto’s administration introduced a raft of new taxes while raising rates on old taxes after the August 2022 elections.
The most recent change to the personal income tax brackets was undertaken made through the Finance Act of 2023 which introduced two new top rates of 32.5 percent and 35 percent but left other tax brackets unchanged.
The government has been dilly-dallying on passing the PAYE relief for the better part of the last 12 months, fearing revenue losses which had been estimated at Sh35 billion annually by the Treasury.
