Kenya’s banking industry has called for a downward review of Pay As You Earn (PAYE) tax bands, proposing that the minimum taxable personal income be raised from the current Sh24,000 to Sh30,000 as part of broader tax reforms ahead of the Finance Bill 2026.
The proposal, submitted through the Kenya Bankers Association (KBA), comes as the National Treasury invites public and stakeholder input on tax policy changes that will inform next year’s Finance Bill. Banks argue that easing the PAYE burden on low- and middle-income earners would help reverse declining purchasing power, stimulate economic activity and expand the tax base over time.
Under the proposal, income below Sh30,000 would be exempt from PAYE, while earnings between Sh30,001 and Sh50,000 would be taxed at 15 percent. Income from Sh50,001 to Sh100,000 would attract a 20 percent rate, earnings between Sh100,001 and Sh400,000 would be taxed at 25 percent, and any income above Sh400,000 would be taxed at a maximum rate of 30 percent.
The banking industry says the proposed structure would simplify the tax regime while offering meaningful relief to salaried workers who have faced mounting statutory deductions in recent years.
“The purchasing power of salaried Kenyans has fallen significantly in recent years. Adjusting PAYE bands is a practical step to restore household income, stimulate spending, and support businesses,” said KBA chief executive Raimond Molenje.
He added that higher take-home pay would have positive spillover effects across the economy. “When workers take home more pay, they spend more, save more, and invest more. This strengthens the economy, improves loan repayment, and ultimately grows government revenue,” Mr Molenje said.
Contrast with current PAYE structure
Currently, PAYE rates under the Finance Act 2023 are significantly more progressive at the upper end. Income is taxed at 10 percent on the first Sh24,000, 25 percent on the next Sh8,333, and 30 percent on the next Sh467,667. Higher earners face marginal rates of 32.5 percent on the next Sh300,000 and 35 percent on income above Sh800,000.
Banks argue that while the structure aims to increase revenue, it has contributed to shrinking real wages and reduced consumer spending, particularly when combined with other statutory deductions.
In addition to PAYE, salaried employees are subject to a growing list of mandatory contributions, including the 1.5 percent Affordable Housing Levy, a 2.75 percent contribution to the Social Health Insurance Fund, and rising National Social Security Fund (NSSF) deductions under the enhanced pension framework.
According to the Parliamentary Budget Office Report 2025, real wages in Kenya fell by 10.7 percent, underscoring the cumulative impact of higher taxes and deductions on household incomes.
Boosting consumption and MSMEs
The banking industry believes revising PAYE bands would provide immediate relief to workers and, by extension, small businesses that rely heavily on consumer spending.
MSMEs, which form the backbone of Kenya’s economy, are particularly sensitive to fluctuations in household disposable income. Reduced purchasing power among salaried workers has translated into weaker demand for goods and services, tightening cash flows for small enterprises.
Banks argue that increased disposable income would lift demand, improve business turnover and enhance the ability of MSMEs to service loans, reducing credit risk in the financial sector.
The industry also contends that higher consumption and investment would broaden the tax base in the medium term, offsetting initial revenue losses from lower PAYE rates.
“Lower tax bands can widen the tax net by encouraging compliance and reducing the incentive for informal arrangements,” KBA said in its submission, noting that predictable and fair taxation supports long-term revenue mobilisation.
Wider tax reform proposals
The PAYE proposal forms part of a broader ten-point reform agenda submitted by the banking industry as part of the Finance Bill 2026 consultations. Beyond income tax, banks are calling for changes aimed at improving business liquidity and reducing compliance costs.
Among the recommendations is a proposal to ease remittance timelines for Withholding Tax and Withholding VAT. The industry suggests that these taxes be remitted by the fifth day of the month following deduction, instead of the tighter timelines currently in place.
KBA says the change would improve cash flow for businesses, particularly MSMEs, while reducing administrative pressure and compliance costs. Improved cash flow, banks argue, would support business growth and encourage formalisation, especially in sectors where margins are thin and working capital constraints are acute.
The industry also links the proposed timeline adjustment to the government’s push for digital payments and formalisation of the economy. By easing compliance, banks believe more businesses would be willing to operate within the formal tax system.
Treasury balancing revenue and relief
The National Treasury is under pressure to balance fiscal consolidation with calls for tax relief, amid high public debt levels and rising demand for public services. Over recent years, the government has leaned heavily on tax increases and new levies to shore up revenue, sparking public debate over affordability and economic impact.
As Treasury prepares the Finance Bill 2026, stakeholder submissions such as those from the banking industry are expected to inform policy choices, although not all proposals are likely to be adopted in full.
Economists note that while reducing PAYE rates could stimulate consumption, the fiscal impact would depend on the scale of the adjustment and the government’s ability to offset revenue losses through improved compliance, economic growth and alternative revenue sources.
The banking industry maintains that the long-term gains outweigh the short-term costs, arguing that an overtaxed workforce ultimately constrains growth and undermines revenue sustainability.
Outlook ahead of Finance Bill 2026
With public participation now underway, the PAYE proposal is likely to feature prominently in discussions around tax fairness, cost of living and economic recovery. For salaried workers, the suggested Sh30,000 tax-free threshold would offer tangible relief, while higher earners would benefit from a lower maximum marginal rate capped at 30 percent.
Whether the Treasury embraces the proposal will depend on fiscal space and political appetite for tax reform in an environment of tight budgets and growing public scrutiny.
As consultations continue, banks are positioning themselves as advocates for policies they say support both economic growth and financial stability, framing tax reform as a tool not just for relief, but for expanding Kenya’s long-term revenue base.
