NAIROBI, Kenya — Commercial banks and savings and credit cooperatives (SACCOs) have urged the government to overhaul the Pay As You Earn (PAYE) tax system, warning that rising statutory deductions and persistent inflation are eroding workers’ disposable income and weakening household finances.
In separate submissions to the National Treasury, the Kenya Bankers Association (KBA) and the Kenya Union of Savings and Credit Cooperatives (KUSCCO) proposed increasing the tax-free income threshold to Sh40,000 and lowering the top PAYE rate to 30 per cent, arguing the current structure no longer reflects the cost of living.
The two lobby groups say Kenyan workers have effectively taken a pay cut over the past five years, despite occasional nominal salary increases, as higher consumer prices and new mandatory deductions continue to bite.
Official data shows that real wages have declined steadily up to 2024, with figures from the Kenya National Bureau of Statistics (KNBS) indicating that the average real monthly wage fell from Sh62,256 in 2020 to Sh55,451 in 2024, a loss of Sh6,805.
The decline has been compounded by additional deductions, including the 1.5 per cent housing levy, 2.75 per cent health insurance contribution, and higher pension payments, significantly reducing employees’ take-home pay.
KBA and KUSCCO argue that revising PAYE bands would boost disposable income, enabling workers to meet basic needs, service loans and save, while reducing the risk of loan defaults across the financial sector.
They further contend that higher take-home pay would stimulate consumer spending in sectors such as tourism, hospitality and entertainment, ultimately expanding government revenue through VAT, excise duty and corporate taxes.
KUSCCO noted that SACCOs have recently recorded a rise in dormant accounts and loan delinquencies as members struggle with shrinking incomes.
Under the current system, monthly income up to Sh24,000 is taxed at 10 per cent, with relief of Sh2,400, while higher bands attract rates of 25 per cent, 30 per cent, 32.5 per cent and 35 per cent for top earners.
The cooperative body has proposed exempting the first Sh40,000 from tax, taxing income between Sh40,001 and Sh60,000 at 20 per cent, the next Sh400,000 at 25 per cent, and capping the highest rate at 30 per cent for earnings above Sh500,000.
“Widening of the tax bands will make the current tax system more progressive and cushion low-income earners amid rising living costs and inflation,” KUSCCO said in its submission to the Treasury.
The proposals come as pressure mounts on the government to balance revenue collection with economic relief for households already stretched by higher taxes and living expenses.
