The Kenya Banker’s Association (KBA) has proposed significant tax relief for the entire workforce. The banking industry is advocating for a uniform 5% reduction in PAYE rates across all bands to restore purchasing power and stimulate economic growth.
This measure is designed to provide immediate relief to workers while strategically boosting the economy.
This proposal comes at a critical time, as many households and businesses continue to grapple with the rising cost of living. According to the KBA, the government’s plan to zero-rate PAYE for incomes up to Sh30,000 monthly is a welcome step in addressing these pressures.
However, additional tax relief measures are crucial, especially to offset the significant burden posed by the upcoming increase in National Social Security Fund (NSSF) contributions.
By February 2027, both employers and employees will be required to contribute up to 6% of pay, a deduction that poses a significant burden, particularly for those without alternative pension schemes. A complementary reduction in PAYE is therefore presented as a necessary buffer to this impending strain.
Capping the highest PAYE rate at 30% aligns with the National Tax Policy and ensures personal income tax does not exceed the corporate tax rate. This alignment promotes fairness and consistency within the tax system.
The move is expected to put more money into people’s pockets, directly increasing disposable income and boosting household consumption. This surge in domestic demand is anticipated to stimulate growth in productive sectors like manufacturing and agriculture, creating a positive cycle of investment and activity.
The proposed tax cuts also aim to reshape how the government collects revenue. By easing the tax burden on labor, the overall tax base could be broadened. Anticipated growth in economic activity would encourage spending, boosting business activity and profits.
As the economy grows, the government could then collect more revenue through indirect taxes like Value Added Tax (VAT) and excise duties, as well as through increased corporate income taxes from more profitable businesses.
Lowering the tax burden supports job creation, especially in sectors where employment is closely tied to domestic demand and labor affordability. Enhanced disposable income improves borrowers’ repayment capacity and expands access to crucial credit for both households and Micro, Small, and Medium Enterprises (MSMEs). This supports entrepreneurship, fuels investment, and strengthens initiatives like the NYOTA programme.
The association also suggests that this stimulus could reinvigorate growth and generate employment across various sectors, both formal and informal. This could effectively reverse the usual slowdown in economic activity observed ahead of general elections, which are typically marked by cautious spending and weaker revenue collection.
Overall, the proposal frames tax relief as a strategic investment in the economy. By giving the workforce more spending power, boosting demand, and supporting business, the tax cut is positioned as essential for growing private credit and building a stronger economy from 2026 onward.
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