In a significant policy shift, the Kenyan Cabinet has approved Finance Bill 2025, requiring all employers to automatically apply eligible tax reliefs and exemptions when calculating employees' pay-as-you-earn (PAYE).
Why This Change?
Finance Bill 2025 introduces the provision that “an employer shall, before computing the tax deductible under subsection (1), grant an employee all applicable deductions, reliefs and exemptions provided under this Act.”
This move aims to remove the burden on employees who previously had to seek refunds from the Kenya Revenue Authority (KRA) directly because employers usually do not apply all reliefs during payroll processing. In addition, Kenyans historically have had to face long in-person queues at KRA offices while following up on tax refunds.
This change also aims to lower KRA's administrative burden in processing the employee’s tax relief claims. The government seeks to streamline the tax process and enhance compliance by requiring employers to incorporate all eligible tax reliefs and exemptions directly into PAYE calculations.
Payroll Needs to Act
With these changes set to take effect on 1 July 2025, payroll teams that are responsible for payroll in Kenya need to take action, such as:
- Update and Test Payroll Systems. Since tax reliefs and exemptions are applied by default, this configuration needs to be updated in the local payroll systems. This requires close collaboration between the provider and customers to perform end-to-end testing, including pay slip validations, to ensure compliance.
- Verify Eligibility. While all tax reliefs and exemptions need to be applied by default, certain exemptions may still apply, and as such, employee records need to be reviewed for eligibility.
- Employee Communication. Since this change will impact the net pay of employees, payroll teams are encouraged to collaborate with HR to proactively engage towards employees with clear information about what this change means to them. If possible, make a pro-forma calculation to detail the difference between the current net pay and the net pay when the change is effective. Also, establish an easy-to-understand group of FAQs and ensure that additional questions are answered in a timely manner.
- Cashflow Management. The required changes will not impact labour costs. However, they do change cash flow since net pay (which is expected to be higher) and taxes under the PAYE scheme (which are expected to be lower) are likely to be paid at different times. Payroll is encouraged to collaborate with Finance and Treasury to understand the impact of the organisation’s cash flow.
Whether you have a large or small employee population in Kenya, this change is an opportunity for payroll to interact with employees and key internal stakeholders, such as HR, Finance, and Treasury.
Constant Legislative Changes
During Global Payroll Week 2025, PAYO published the Getting the World Paid Survey Report and the top challenge in global payroll is ensuring local compliance. This new legislative change in Kenya is an example of the ever-changing regulatory environment in which global payroll teams find themselves and underscores the need to stay updated about legislative changes.
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Max van der Klis-Busink, MCIPP, RPP, is the Owner of Passion For Payroll and Vice President of Global Strategy on PayrollOrg’s Board of Directors.
