Employed Kenyans may soon see a reduction in their take-home pay if a proposal from the National Treasury to eliminate certain Pay as You Earn (PAYE) tax reliefs is approved. The move is part of the government’s effort to enhance revenue collection.
The National Treasury aims to revisit existing tax incentives, which currently provide relief to taxpayers. The rationale behind this proposal is to increase revenue collection for the exchequer. While these tax incentives are designed to influence taxpayer behaviour, they come at a cost in terms of forgone tax revenue. Additionally, such incentives can complicate the tax system and diminish its effectiveness in promoting fairness.
The medium-term revenue strategy, covering the financial years 2024/25 to 2026/27, outlines the details of this proposal. Currently, Kenyan workers benefit from a Sh2,400 personal relief. Those with insurance premiums for life, health, or education policies receive a 15% relief, capped at Sh60,000 annually.
Starting in January 2022, contributions to the National Hospital Insurance Fund (NHIF) also qualified for insurance relief. The Finance Act of 2023 introduced two new tax bands at 32.5 per cent and 35 per cent for high-income earners with monthly salaries exceeding Sh500,000 and Sh800,000, respectively.
The potential scrapping of these tax reliefs has raised concerns among workers and experts alike. The World Bank, in its recent Kenya Economic Update (KEU), cautioned that additional taxes could place a heavier burden on households already grappling with the high cost of living.
This proposal follows the introduction of the new PAYE bands earlier this year, which, some argue, have not proven effective in significantly boosting revenue from employment income for the government.
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