Commercial banks and saccos are pressing the state to ease payslip taxes, including lifting tax-free salary band to Sh40,000
Commercial banks and saccos are pressing the state to ease payslip taxes, including lifting tax-free salary band to Sh40,000 and lowering the higher tax band to 30 per cent, as inflation and higher compulsory deductions continue to erode workers’ incomes.
The proposals, submitted separately by the Kenya Bankers Association (KBA) and the Kenya Union of Savings and Credit Cooperatives (Kuscco), focus on reforming Pay as You Earn (PAYE) income tax, which lenders the duo say has failed to keep pace with the cost of living.
Their push comes against the backdrop of official data showing that Kenyan workers have suffered five consecutive years of inflation-adjusted pay cuts up to 2024, with last year carrying slim chances of bucking this trend. The modest rises in nominal wages that firms have managed to deliver in a soft economy have been wiped out by higher consumer prices and new or enhanced statutory deductions to fund affordable housing, social health insurance, and retirement contributions.
The average monthly real pay has fallen from Sh62,256 in 2020 to Sh55,451 in 2024, translating to an erosion of Sh6,805, according to the Kenya National Bureau of Statistics. Introduction of a 1.5 per cent housing levy and 2.75 per cent health cover? deductions on gross pay, as well as enhanced retirement contributions, has sliced the take-home pay further.
KBA and Kuscco have told the Treasury that reforming PAYE will boost disposable income and provide more room for workers to borrow to support their own investments and grow the economy without hitting the financial sector with higher loan defaults.
Kenya Union of Savings and Credit Co-operatives (Kuscco) centre in Nairobi on March 11, 2025.
In addition, the two financial sector lobbies say changes in PAYE will strengthen purchasing power and allow higher discretionary spending across sectors such as tourism, entertainment, and hospitality, handing the government increased revenues through corporate income tax and consumption-based taxes such as VAT and excise duty.
Kuscco is proposing that the tax-exempt income band be raised to Sh40,000 a month from the current Sh24,000, arguing that the current PAYE structure disproportionately penalises low and middle-income earners. Many saccos have seen a rise in dormant membership and loan defaults in such an environment.
Under the current PAYE structure, monthly earnings of up to Sh24,000 are taxed at 10 per cent but fully compensated through Sh2,400 tax relief. Income between Sh24,001 and Sh32,333 is taxed at 25 per cent, the next Sh467,607 at 30 per cent, the following Sh300,000 at 32.5 per cent, and any income exceeding Sh800,000 is taxed at 35 per cent.
However, Kuscco wants the Treasury to exempt the first Sh40,000 from tax, tax 20 per cent on income between Sh40,001 and Sh60,000, 25 per cent on the next Sh400,000, and 30 per cent on all income over Sh500,000.
“Widening of the tax bands will make the current tax bands more progressive to cushion low-income earners, in the wake of rising cost of living and inflation rates,” said Kuscco in the proposal.
“Notably, disposable incomes have reduced due to the introduction of the affordable housing levy under the Affordable Housing Act, 2024, Social Health Insurance Fund contributions from October 2024, and the expected increase in the statutory contributions to the National Social Security Fund (NSSF) from February 2026, which will further impact the net take-home pay of employees.”
Recent Finance Bills have introduced minor adjustments to PAYE, such as changes to allowances and benefits, but the core tax bands and entry thresholds have remained largely unchanged despite the new or enhanced deductions that have increased the effective tax burden of low and middle-income earners.
Kuscco’s proposal, which was received by the Treasury on December 31, 2025, follows that of KBA in mid-December.
KBA wants the Treasury to tax the first Sh30,000 at 10 percent and increase tax relief to Sh3,000, effectively exempting this band from tax. It wants the next Sh20,000 taxed at 15 percent, followed by Sh50,000 taxed at 20 percent, income between Sh100,001 and Sh400,000 taxed at 25 percent, and income exceeding Sh400,000 to be taxed at 30 percent.
“In the last five years, the country’s real wages have declined by 12 percent according to Kenya National Bureau of Statistics (KNBS) data due to inflation and other factors, including increased taxes,” says KBA in the proposal.
“When workers take home more pay, they will be able to spend more, save more, and invest more. The trend will support small businesses, create jobs, improve loan repayment, and increase government revenue in both the short and long term.”
Bankers see a higher net income improving borrowers’ loan repayment ability and lowering loan defaults. Currently, bankers said, an estimated Sh16 out of Sh100 borrowed is not repaid, increasing lending risk for banks and high interest rates for borrowers.
KBA sees PAYE reduction for low-income workers, making formal jobs more attractive for both employers and employees.
Kuscco supports the KBA position, arguing that in the absence of PAYE reforms, many employers are likely to respond with cost‑containment measures such as voluntary redundancies, early retirements, or layoffs as higher taxes and statutory deductions increase labour costs.
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