NEW PAYE TAX EXEMPTION TO TAKE EFFECT IN JANUARY- MBADI

National Treasury Cabinet Secretary John Mbadi has announced that the government expects its proposed Pay As You Earn (PAYE) tax exemption for workers earning up to KSh32,333 per month to take effect in January 2027, subject to parliamentary approval.

Mbadi said on Thursday, October 22, that the Treasury was finalising the legislative proposal for submission to Parliament, following President William Ruto’s directive to raise the tax-free income threshold from the initially proposed KSh30,000 to KSh32,333.

The proposed changes are expected to exempt an additional 362,846 formally employed Kenyans from PAYE, increasing the number of workers paying no income tax from approximately 1.329 million to 1.692 million.

According to the Treasury, about 3.468 million Kenyans are in formal employment, with approximately 1.778 million expected to continue paying PAYE under the proposed arrangement.

Mbadi said the government had considered the changes against the backdrop of economic recovery, arguing that workers who have carried a significant share of the tax burden should begin benefiting from improvements in the economy.

He noted that measures introduced to stabilise the economy after the difficult conditions experienced in 2022 were beginning to show results, creating an opportunity to return some of the gains to salaried workers.

Under the current tax framework, monthly income up to KSh24,000 falls within the lowest PAYE band, while the next KSh8,333 is taxed at 25 per cent. The government now wants to extend the zero-tax threshold to KSh32,333, giving lower-income workers more money to meet their daily expenses.

Mbadi said employees earning between KSh24,000 and KSh32,333 would benefit from an additional KSh2,083 in their monthly take-home pay if the proposal is implemented.

The Treasury CS, however, disclosed that the government intends to scrap the existing personal tax relief of KSh2,400 per month, equivalent to KSh28,800 annually, as part of the restructuring.

Currently, the relief is deducted from the income tax calculated on an employee’s salary, reducing the amount ultimately paid to the Kenya Revenue Authority. Under the proposed arrangement, the government intends to adjust the tax bands to exempt eligible workers directly rather than relying on the personal relief system.

The broader changes will also affect employees earning above the new threshold, with the proposed adjustments redistributing part of the tax burden to higher-income earners. Workers earning between KSh60,000 and KSh80,000 or more could face additional monthly deductions, depending on their income and the final tax bands approved.

President Ruto announced the revised threshold during the 63rd Mashujaa Day celebrations at Kipchoge Keino Stadium in Eldoret on October 20, saying the measure was intended to ease the financial pressure on workers earning modest salaries.

The President argued that the additional money retained by workers could help cover essential expenses, including food, transport and school fees.

The proposal had previously faced concerns over its potential impact on government revenue, with estimates suggesting that exempting low-income earners could create a substantial shortfall. The administration has since revived the plan, citing improvements in economic conditions and the need to cushion households against the high cost of living.

Mbadi said the Treasury was working to complete the necessary legal adjustments and forward them to the Attorney-General before the proposal is presented to Parliament.

He expressed optimism that lawmakers would approve the changes before proceeding on recess, paving the way for implementation in January 2027.