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Overview of Key Changes to PAYE Regulations (2025)
On December 11, 2024, President William Ruto enacted the Tax Laws (Amendment) Bill (National Assembly Bill No. 47 of 2024), bringing major changes to Kenya's Pay As You Earn (PAYE) system. These changes aim to improve employee benefits, simplify deductions, and replace the National Hospital Insurance Fund (NHIF) with the new Social Health Insurance Fund (SHIF). This guide explains the updated PAYE regulations for 2025 and provides instructions for calculating tax obligations using the new
1.New Allowable Deductions in Taxable Income:
- Contributions to SHIF.
- Monthly contributions to post-retirement medical funds (capped at Ksh 15,000).
- Contributions to affordable housing.
These deductions are designed to increase disposable income and improve take-home pay for employees.
2.Increased Deductions for Pension and Provident Fund Contributions:
- Employee contributions to registered pension schemes have increased from Ksh 240,000 to Ksh 360,000 annually (Ksh 20,000 to Ksh 30,000 monthly).
- Employers’ contributions have been adjusted accordingly.
- Higher Deduction Limits for Individual Retirement Funds:
- Contributions to registered individual retirement funds or public pension schemes are now deductible up to Ksh 360,000 annually (Ksh 30,000 monthly), up from Ksh 240,000.
3.Repeal of Affordable Housing Relief:
- The Affordable Housing Relief has been repealed but is now included as an allowable deduction under Section 15 of the Income Tax Act.
4.Alignment with the Social Health Insurance Act:
- Section 31 of the Income Tax Act has been updated to align with the Social Health Insurance Act of 2023, replacing NHIF with SHIF (effective from October 1, 2024).
Understanding PAYE:
PAYE (Pay As You Earn) is a system where employers deduct income tax from their employees' salaries and remit payments directly to the Kenya Revenue Authority (KRA). This ensures consistent tax revenue and compliance throughout the year.
With the introduction of SHIF, the PAYE Calculator Kenya now accounts for these new contributions, simplifying the tax calculation process.
Taxable Employment Income in Kenya:
The following are considered taxable when calculating PAYE:
- Cash Payments: Salaries, bonuses, allowances, commissions, and overtime.
- Non-Cash Benefits: Benefits like car allowances, employer-provided housing, or low-interest loans (above Ksh 3,000/month) are taxable.
- Mileage Reimbursement: Reimbursements exceeding AA Kenya rates for work-related travel are taxable.
- Club Fees: Fees paid by your employer for business-related purposes are taxable.
Employer Obligations under PAYE:
Employers must:
- Register for PAYE if they are paying salaries or benefits.
- Deduct taxes using the correct PAYE tax tables.
- Remit taxes to the KRA by the 9th of the following month.
- File PAYE returns detailing employee tax deductions.
With SHIF replacing NHIF, employers must update their payroll systems to ensure compliance. The updated PAYE Calculator Kenya now reflects SHIF deductions for easy and accurate tax calculations.
PAYE CALCULATORPAYE Calculation:
PAYE is calculated based on gross salary minus allowable deductions, which include:
- Gross Salary: The total salary before any deductions.
- Non-Taxable Benefits: Benefits that are not subject to taxation.
- Tax Brackets: Tax rates range from 10% to 35% as of July 2023.
- Allowable Deductions: Mortgage interest (up to Ksh 300,000 annually), pension contributions (up to Ksh 20,000/month), and SHIF contributions.
SHIF Replacing NHIF (Effective October 1, 2024):
- SHIF replaces NHIF from October 1, 2024, and contributions are calculated at 2.75% of the gross salary, with a minimum contribution of Ksh 300 per month and no maximum limit.
- Employers must remit SHIF contributions by the 9th of the following month, along with PAYE.
Note: As of November 8, 2024, the KRA clarified that insurance relief available for NHIF contributions does not apply to SHIF contributions. However, a proposed amendment to the Tax Laws seeks to make SHIF contributions deductible from taxable income.
Tax Reliefs in Kenya:
Employees can claim various tax reliefs, including:
- Personal Relief: Ksh 2,400 per month for residents.
- Other Reliefs: For insurance premiums and post-retirement medical fund contributions.
The PAYE Calculator Kenya now includes SHIF contributions and tax reliefs, making it easier to assess tax liabilities.
PAYE Tax Rates in Kenya (as of 2025):
Kenya uses a tiered tax system, and the PAYE Calculator applies the following rates:
- First Ksh 24,000: 10%
- Next Ksh 8,333: 25%
- Next Ksh 467,667: 30%
- Next Ksh 300,000: 32.5%
- Income above Ksh 800,000: 35%
The updated PAYE Calculator Kenya ensures accurate calculations of tax liabilities, including SHIF deductions.
PAYE Example Calculation:
For a gross salary of Ksh 100,000 and a contribution of Ksh 10,000 to a registered pension scheme:
- Taxable Income: Ksh 100,000 - Ksh 10,000 = Ksh 90,000
Tax Calculation:
- Ksh 24,000 x 10% = Ksh 2,400
- Ksh 66,000 x 25% = Ksh 16,500
Total Tax Payable = Ksh 18,900
The PAYE Calculator Kenya will automatically calculate this, including SHIF deductions.
Affordable Housing Levy:
Employers and employees contribute 1.5% of the gross salary to the Affordable Housing Levy, which is included in the updatedPAYE Calculator Kenya.
PAYE Filing Process:
Employers should:
- Compile employee data and file PAYE returns via iTax (even if it’s a nil return).
- The updated PAYE Calculator Kenya helps gather necessary information for accurate returns, including SHIF contributions.
PAYE Penalties for Non-Compliance:
Penalties for non-compliance include:
- Late Filing: 25% of the tax due or Ksh 10,000, whichever is higher.
- Late Payment: 5% of the tax due plus 1% interest per month.
- Failure to Deduct and Remit: 25% of the tax due or Ksh 10,000, whichever is higher.
With SHIF now integrated into PAYE, it is crucial for both employers and employees to stay informed and use the updated PAYE Calculator Kenya for accurate tax calculations and compliance.
This updated guide should provide clear insights into the new PAYE rules and assist with using the PAYE Calculator Kenya effectively.
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