Bankers push for PAYE reforms in Kenya to support incomes

• Bankers are lobbying for tax and PAYE reforms in Kenya to help restore household incomes, boost spending and support businesses in a tough economy.
• The proposal aims to increase the tax-free income limit from KES24,000 to KES30,000 and set the top rate at 30%.
• The move is in response to the 10.7% real wage decline highlighted by the 2025 Parliamentary Budget Office report.

The Kenya Bankers Association (KBA) has proposed a major change to the Pay As You Earn (PAYE) tax structure in a bold bid to boost the Kenyan economy. They want to increase the tax-free income limit from KES24,000 to KES30,000 and set the top rate at 30 percent.

This ten point planwhich was tabled during the discussions on the Finance Bill 2026, aims to broaden the tax base by adding progressive bands: 15 percent on income from KES30,001 to KES50,000; 20 percent on KES50,001 to KES100,000; 25 percent on KES100,001 to KES400,000; and 30 percent on KES400,000 and above.

KBA CEO Raimond Molenje says this change will “restore household incomes, boost spending and support businesses.” The proposal is a response to the 10.7 percent real wage decline mentioned in the 2025 Parliamentary Budget Office report.

The CBA proposal also aims to improve cash flow by moving the deadline for paying withholding tax and VAT to the 5th of the following month, arguing that this could boost the economy as it faces inflation and stagnant wages.

“According to the KBA’s Total Tax Contribution report, an average of three full-time employees were involved in tax compliance functions, with an estimated annual cost of KES 13.5 million per bank. In addition to regular staffing, each bank surveyed had on average an additional KES 1.9 million to hire additional staff specifically dealing with tax compliance. For those that engaged external advisors, the average annual cost was KES 3.8 million. These figures underline the significant internal and external resources which are now focused on managing tax obligations. This in our This view is contrary to the design of a fair tax law that should not impose punitive compliance burdens on taxpayers,” KBA said.

PAYE reforms in Kenya are aimed at increasing returns for individuals

The KBA’s plan could change the situation for Kenyan workers by immediately increasing their take-home pay and easing financial stress in a high-cost environment. The current Finance Act 2023 says that PAYE starts at 10 percent on the first KES24,000 and goes up to 35 percent on income above KES800,000.

These PAYE bands are in addition to other taxes, such as the 1.5 percent Affordable Housing Levy and the 2.75 percent contribution to the Social Health Insurance Fund. What happened? According to KBA, a middle-class person earning KES 50,000 per month could see their take-home pay drop by 20 to 25 percent. If the tax-free limit were increased to KES30,000, it could give these families KES5,000 to KES7,000 more every month, which would encourage them to buy more basic goods and services and boost consumer demand.

This help comes at the right time: 2025 data from the Kenya National Bureau of Statistics (KNBS) shows that household expenditure remained flat at 3.2 percent growth, while inflation stood at 6.5 percent, making it harder to buy things. The extra money means that people can afford better education, health care and savings. This could reduce the number of people defaulting on loans by 15 percent, as Molenje suggests.

A 2025 World Bank report on East African economies says similar tax breaks in Uganda increased disposable income by 12 percent, leading to a 5 percent increase in retail spending. This could help break the cycle of poverty in Kenya, where 60 percent of urban households live paycheck to paycheck (Afrobarometer, 2025). It would give families the freedom to invest in skills or small businesses, which would indirectly boost economic mobility.

Empowering SMEs: Better Cash Flow and Business Viability

Micro, Small and Medium Enterprises (MSMEs) make up 80 percent of Kenya’s workforce and are responsible for 40 percent of the country’s GDP (KNBS, 2025). They will benefit enormously from the longer payment terms of the CBA. Tight deadlines are currently putting pressure on cash flows, with 45 percent of SMEs saying they are struggling to raise funds (Central Bank of Kenya, 2025 SME Finance Survey).

According to KBA estimates, an extension until the fifth of the following month could free up KES50-100 billion in working capital each year. This would allow companies to buy more inventory, pay their employees or grow.

For MSMEs, this means staying alive and growing. The survey shows that 35 percent of small businesses delay paying their suppliers because of taxes, which could hurt their credit score. If more money came in, they could hire more people, which would increase employment in sectors like retail by 10 to 15 percent (ILO, Kenya Labor Report 2025).

Molenje’s aim to ‘encourage savings and investment’ appears to be in line with the African Development Bank’s 2025 report, which found that relaxed tax policies in Rwanda led to a 22 percent increase in MSME investments and the creation of 50,000 jobs. In Kenya, where small and medium-sized businesses have an 18 percent chance of getting a loan (CBK, 2025), better finances could make them more reliable and free up KES 200 billion in loans, notes the World Bank.

Growth driven by consumption: a win-win situation for government revenues

KBA’s plan is not only good for the economy; it also makes sense from a business perspective, as it would lead to more government revenue through increased spending and investment. According to CBA models, workers could spend an additional KES 300 billion annually by increasing disposable income. This would increase VAT collections by 8 to 10 percent. The Parliamentary Budget Office agrees: wage reduction in 2025 could generate KES50 billion in indirect taxes as it would stimulate demand.

This is supported by real-world data: Uganda’s 2023 PAYE changes raised 12 percent more money by encouraging more spending (IMF, East Africa Fiscal Report 2025). This could add 0.5 to 1 percent to growth in Kenya, where consumption accounts for 70 percent of GDP (KNBS, 2025). Some people say it helps the middle class, but the KBA says a larger tax base — with potentially 500,000 payers — makes it fair, and the 30 percent cap keeps high earners from leaving.

Problems and things to think about: honesty in care

Although the proposal looks good, it has some problems. Fiscal conservatives say this will create a revenue shortfall of KES 100 billion (Ministry of Finance estimates, 2025), meaning spending cuts will have to be made. There are equity issues because low-income workers earning less than KES30,000 (40 percent of the workforce, KNBS 2025) do not see many benefits, which could worsen inequality. A 2025 PwC tax report notes that implementation risks, such as spikes in evasion, can make benefits less useful.

But the plan’s focus on formalization – promoting digital payments – could bring in 15 percent more people, making up for the losses (CBK, 2025). The KBA’s vision could change the way taxes work in Kenya, making the economy more dynamic as public consultations take place.

Also read: Kenya unveils plan to help MSMEs meet international export standards

($1=KES129)