Taxation of Employment Income and PAYE
Income Tax
Taxation of Employment Income and PAYE
Syllabus tag: KASNEB CPA | Intermediate Level | CA26 Public Finance and Taxation | Topic 3 Taxation of Employment Income and PAYE
Rates check. The bands and reliefs below are those in force in 2026. Tax rates change with each Finance Act, so confirm the current figures on the KRA website before relying on them in practice or in an examination.
Lesson objectives
By the end of this topic, you will be able to:
- Identify what constitutes taxable employment income
- Apply the allowable deductions that reduce taxable pay
- Compute PAYE using the graduated bands
- Apply personal relief and other reliefs correctly
- State the employer's obligations and the penalties for failure
Why this matters
PAYE is the single largest source of income tax revenue in Kenya, and every employer is an unpaid collection agent for KRA. A payroll error is the employer's liability, not the employee's.
Taxable employment income
Employment income under the Income Tax Act (Cap 470) includes:
- Basic salary, wages, leave pay and sick pay
- Bonuses, commissions and overtime
- Directors' fees
- Allowances — house, transport, entertainment
- Benefits in kind, valued under the Act
Employment income is taxed on a receipts basis: it is taxable when received, not when earned.
Benefits in kind are valued by prescribed rules rather than by what they cost the employer. Motor vehicle benefit, housing benefit and low-interest loan benefit each have their own valuation rules, and the higher of the prescribed value and the actual cost usually applies.
Benefits of an aggregate value below the statutory threshold are not taxed, and certain items are specifically exempt — medical cover for an employee, and an employer's contribution to a registered pension scheme within the allowable limit.
Allowable deductions
These reduce taxable pay before the bands are applied:
| Deduction | Rate or limit |
|---|---|
| NSSF | 6% of pensionable pay, up to a ceiling |
| SHIF | 2.75% of gross pay |
| Affordable Housing Levy | 1.5% of gross pay |
| Registered pension contribution | subject to the statutory monthly cap |
| Owner-occupier mortgage interest | subject to the statutory cap |
The Tax Laws (Amendment) Act 2024 made SHIF and the Housing Levy deductible in arriving at taxable pay. Before that they were deducted from net pay, so a computation using the older treatment overstates the tax.
The graduated bands
Monthly, for 2026:
| Monthly taxable pay (KES) | Rate |
|---|---|
| First 24,000 | 10% |
| Next 8,333 (24,001 to 32,333) | 25% |
| Next 467,667 (32,334 to 500,000) | 30% |
| Next 300,000 (500,001 to 800,000) | 32.5% |
| Above 800,000 | 35% |
Personal relief is KES 2,400 a month, or 28,800 a year. It is deducted from the tax computed, not from taxable income — a distinction worth holding onto, because relief deducted from income would be worth far less.
The relief creates an effective tax-free floor: an employee on 24,000 a month pays 10% × 24,000 = 2,400, exactly cancelled by the relief. Note that Kenya has no zero-rate band; tax runs from the first shilling and the relief does the work instead.
Non-residents do not receive personal relief.
A full computation
An employee earns a gross salary of KES 150,000 a month.
Step 1 — allowable deductions
| KES | |
|---|---|
| NSSF (6% of 108,000 ceiling) | 6,480.00 |
| SHIF (2.75% of 150,000) | 4,125.00 |
| Housing Levy (1.5% of 150,000) | 2,250.00 |
| Total | 12,855.00 |
Step 2 — taxable pay = 150,000 − 12,855 = KES 137,145
Step 3 — apply the bands
| Band | Amount | Rate | Tax |
|---|---|---|---|
| First | 24,000 | 10% | 2,400.00 |
| Next | 8,333 | 25% | 2,083.25 |
| Balance | 104,812 | 30% | 31,443.60 |
| Gross tax | 35,926.85 |
Step 4 — deduct relief
35,926.85 − 2,400.00 = PAYE payable KES 33,526.85
Net pay = 150,000 − 12,855 − 33,526.85 = KES 103,618.15
:::checkpoint The employee's gross pay rises to 160,000. Without computing the whole statement again, say which band the extra 10,000 falls into and what the additional PAYE will be, ignoring the effect on NSSF, SHIF and the levy. :::
Other reliefs
- Insurance relief — 15% of premiums on life, education or health policies, subject to a monthly cap
- Mortgage interest — on an owner-occupied residence, subject to a cap
- Disability exemption — for persons with a valid exemption certificate
Employer obligations
- Deduct PAYE from each payment of emoluments
- Remit by the 9th of the following month
- File the P10 return through iTax
- Issue each employee a P9 tax deduction card annually, which the employee uses to file their own return by 30 June
- Keep records for the statutory period
Penalties. Late remittance attracts a penalty of 25% of the tax due, plus interest at 2% a month on the unpaid amount. Failure to deduct makes the employer liable for the tax itself — the obligation does not pass back to the employee.
:::checkpoint An employer deducts PAYE correctly but remits it three months late. Compute the exposure on KES 400,000 of tax, and explain why the employer cannot recover this from staff. :::