Kenyan banks have proposed reducing the Pay As You Earn (PAYE) tax bands, arguing that easing the financial pressure on salaried workers could revive consumption and stabilise the economy weighed down by weak household demand.
In submissions to the National Treasury ahead of the Finance Bill 2026, the Kenya Bankers Association (KBA) wants the minimum taxable income raised from Sh24,000 to Sh30,000 and the top PAYE rate capped at 30 percent.
The lenders say the current tax structure has compressed disposable incomes, dampened spending, and constrained small businesses that rely heavily on consumer demand for survival.
Under the proposal, monthly income below Sh30,000 would be exempt from PAYE, while earnings between Sh30,001 and Sh50,000 would be taxed at 15 percent.
Income between Sh50,001 to Sh100,000 would attract a 20 percent tax rate, Sh100,001 to Sh400,000 would be taxed at 25 percent, and any income above Sh400,000 would be taxed at 30 percent.
‘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 CEO Raimond Molenje.
The current monthly PAYE rates are:
10 percent on the first Sh24,000
25 percent on the next Sh8,333
30 percent on the next Sh467,667
32.5 percent on the next Sh300,000
35 percent on income above Sh800,000.
Additional deductions include the 1.5 percent Affordable Housing Levy, the 2.75 percent Social Health Insurance Fund contribution, and increasing National Social Security Fund contributions.
KBA says the cumulative effect of these deductions is a 10.7 percent decline in real wages, citing the Parliamentary Budget Office Report 2025.
The jump in taxes and other statutory contributions has seen some employers flout the rule requiring them to ensure that mandatory and voluntary deductions do not exceed two-thirds of an employee’s basic pay.
KBA’s proposal comes against a backdrop of persistent cost-of-living pressures, stagnant wage growth and rising statutory deductions, which have eroded real incomes for formally employed workers.
Economists have warned that declining real incomes are constraining domestic demand, slowing turnover for micro and small enterprises, and increasing default risks in household and SME lending.
Banks argue that tax relief at lower- and middle-income levels would inject liquidity directly into the economy, supporting consumption-led growth rather than relying solely on public spending.
The industry maintains that broader economic activity generated by higher spending would widen the tax base and improve compliance, offsetting short-term revenue losses from lower PAYE rates.
The proposal also reflects growing concern that repeated tax increases have reached diminishing returns, raising revenue pressures while weakening economic momentum.
The Treasury has faced mounting pressure to balance revenue mobilisation with economic recovery, as it grapples with high debt servicing costs and constrained fiscal space.
Recent finance bills have relied heavily on consumption and income taxes, prompting criticism from businesses and workers who argue that the burden has become unsustainable.
In addition to PAYE changes, banks are calling for relaxed Withholding Tax and Withholding VAT remittance timelines, proposing payment by the fifth day of the month following deduction.
KBA says the change would ease cash flow constraints for businesses, reduce compliance costs and encourage formalisation, particularly among small enterprises transitioning into the tax net.
The proposal lands as the Treasury weighs competing demands ahead of the 2026 budget, including funding social programmes, meeting debt obligations and sustaining economic growth.