Stakeholders say proposal will generate billion of shillings and create new jobs.
Private sector players, bankers and accountants want Parliament to cap pay-as-you-earn (PAYE) taxes imposed on employees’ salaries at 30 per cent across all five tax bands, arguing it will generate Sh28.1 billion to taxman and create 36,000 new jobs per year.
The Kenya Private Sector Alliance (Kepsa) told the National Assembly's Finance and National Planning Committee to amend the Finance Bill, 2026, to cut the rate of tax from the current 35 per cent to 30 per cent across the board for all tax bands.
Appearing before the committee to present their views on the Finance Bill, Kepsa asked MPs to amend the Third Schedule of the Income Tax Act to compress and expand the bands so that the maximum PAYE rate is capped at 30 per cent.
The umbrella body said the current provision of the law sets individual rates of tax for PAYE, featuring five bands, topping out at 32.5 per cent for income over Sh5,612,000 annually and a maximum marginal rate of 35 per cent on all annual income exceeding Sh9,600,000 or Sh800,000 monthly.
"Kepsa proposes amending the Third Schedule of the ITA to compress and expand the bands so that the maximum PAYE rate is capped at 30 per cent." Jaswinder Bedi, the Kepsa chairperson, said. "We also propose an increase of the monthly personal relief to Sh3,000, setting a tax-free threshold at Sh30,000."
Dr Bedi told the committee, chaired by Molo MP Kuria Kimani, that salaried Kenyans have faced a severe erosion of purchasing power, highlighted by a 10.7 per cent to 12 per cent decline in real wages due to inflation and cumulative tax additions like the Affordable Housing Levy pegged at 1. 5 per cent and the Social Health Insurance Fund of 2.75 per cent.
He said the current 35 per cent top rate is higher than the 30 per cent corporate tax rate, meaning individuals face heavier tax rates on gross earnings than corporations do on net profits.
Dr Bedi said Kenya also taxes low-income earners excessively compared to peers, and its 30 rate proposal kicks in at just Sh32,333 monthly, compared to equivalents of Sh255,000 in Ghana and Sh237,000 in South Africa.
Clients seeking services at KRA headquarters, Times Tower, Nairobi.
"Capping the rate at 30 per cent aligns with the Medium-Term Revenue Strategy to harmonise individual top rates with corporate rates," he said.
"This five percent relief would inject Sh28.1 billion back to workers, boosting household spending, increasing indirect tax collection, reducing non-performing loans (NPLs), and driving a Gross domestic product output boost of Sh210 billion in the first year," Dr Bedi said.
"This ultimately generates Sh27.1–31.5 billion in tax revenue, offsetting the initial government shortfall while creating thousands of jobs."
Raimond Molenje, the Kenya Bankers Association (KBA) chief executive, told MPs that if the PAYE is reduced by five percent, banks will be able to extend loans of up to Sh10 billion to Kenyans, as workers will be able to borrow and repay their debts using the disposable income.
"The Kenya Revenue Authority will collect up to Sh33 billion in taxes and this will effectively seal the gap created by the foregone five percent PAYE," he said.
Samuel Mwaura, Partner-Tax at Grant Thornton, separately asked the committee to amend the Income Tax Act to reduce the PAYE for all salaried employees to 30 per cent. He said formal salaried employees under the PAYE framework are tax compliant by default and possess no avenues to defer or mitigate their tax liabilities.
Domestic tax obligations
"They shoulder a disproportionate percentage of direct domestic tax obligations compared to the informal economy. Expanding the bands offers immediate relief. Keeping net pay stable does not mean a net loss for the government. Formal employees spend the vast majority of their disposable income immediately on household goods," Mr Mwuara said.
"Elevating net take-home pay directly triggers consumer spending, driving immediate, predictable return revenue Added Tax (VAT) and Excise Duties at the point of sale."
Mr Mwaura also demanded clause five of the Bill on contribution to gratuity in respect of employee or service rendered, arguing that employees on one-year or two-year contracts, which are common in non-governmental organisations, construction, and fixed-term projects, will face a significant financial hit.
"Their gratuity will be consolidated with employment income and taxed. Unlike gratuity for employees with three or more years of service. This penalizes short term contract workers, discourages formal sector participation and undermines social protection for vulnerable workers," he said.
"The government should allow implementation of the exemption provisions introduced under Finance Bill 2025 in order to ensure equity and fairness in the taxation of gratuity.
Mr Jaswinder Bedi.
Dr Bedi said data from the latest Kenya National Bureau of Statistics (Knbs) Economic Survey 2026 backs their revenue projection to the government, should a five percent reduction in PAYE be adopted.
He said the KNBS statistics showed that Kenya's real GDP grew by 4.6 per cent in 2025, but structural labour weaknesses persist. He said high production costs and unaligned fiscal rules have suppressed the formal economy, leaving formal sector employment at a mere 16.2 per cent of total jobs of 3.5 million workers, while the informal sector handles an overwhelming 83.8 per cent burden or 18.1 million workers.
"To ensure long-term economic stability and avoid fiscal leakage, the Finance Bill 2026 must anchor its tax adjustments across three core strategic pillars: enhancing global and regional competitiveness, creating and protecting jobs, and enhancing government revenue legitimately.
"According to the World Bank, implementing pro-competitive structural reforms in key infrastructure and trade sectors can boost Kenya's annual GDP growth rate by 1.35 percentage points. Kenya must align its tax regime with the East African Community (EAC) Common External Tariff (CET) bands (0 per cent, 10 per cent, 25 per cent, and 35 per cent to insulate local supply chain. This alignment is vital to maintaining our status as East Africa's primary logistics and industrial hub against nations like Ethiopia and Rwanda, which continue to offer highly supportive and predictable fiscal frameworks for foreign direct investment," he said.
"Reversing structural weaknesses in the labor market requires a tax regime that encourages industrial capital investment rather than penalising operating cash flows. Fully optimizing private sector productivity can unlock up to 400,000 decent, formal-sector jobs annually."
He said the Finance Bill must protect our largest wage-employment contributors, such as manufacturing, which anchors over 366,000 formal private sector jobs and agriculture by removing unclaimable input tax burdens that force staff layoffs, automated downscaling, or complete corporate closures.
Dr Bedi said true revenue mobilisation is a by-product of expanding the economic base, not increasing tax rates on a shrinking pool of formal taxpayers. High tax rates , he said, historically trigger tax evasion, drive businesses into the informal shadows, and lower collections.
"By keeping tax rates predictable, simplifying compliance procedures, and introducing clear valuation safe-harbors, the government can stimulate compliance, encourage informal enterprises to formalize, and sustainably grow ordinary tax revenues in line with the Treasury's targets," he said.
The Kenya Stock Brokers and Investment Banks (KISIB) chief executive Willie Njoroge asked the committee to amend the Income Tax Act to exempt Trust Funds created out of Pension and Death Benefit from the scheme. He said Trust funds established by pension funds are not exempt from income tax.
"The intent of tax exemption should be sustained whether alive or deceased. Trust Funds support the vulnerable beneficiaries through education, medical, and upkeep hence deserves tax exemption."
The stakeholders demanded complete deletion of the proposed tax increases on card payments and digital reforms, VAT on digital financial services, elimination of protection against agency notices among others proposed in the Finance Bill, 2026.
Follow our WhatsApp channel for breaking news updates and more stories like this.
