NAIROBI, Kenya — National Treasury Cabinet Secretary John Mbadi has defended the decision to leave proposed Pay As You Earn (PAYE) tax relief out of the Finance Bill 2026, saying the government is still assessing its fiscal impact amid mounting economic pressures and uncertain revenue projections.
Speaking to the media on Monday, Mbadi said the Treasury had not abandoned the proposal but was conducting simulations to determine whether the country could absorb the expected revenue loss without destabilising the national budget.
“The simulation is presently being done. Actually, we have some reports,” Mbadi said.
He explained that the government was factoring in both domestic and global economic shocks, including instability in the Middle East and its impact on fuel prices and tax revenue.
“Remember, there is a war in the Middle East. We are looking at the impact of that war. Already, we have reduced VAT on petroleum products; we don’t know for how long. So that is something we must factor into our revenue projections,” he said.
Mbadi revealed that discussions with President William Ruto were ongoing and indicated that the PAYE adjustment could still be introduced through amendments to the Finance Bill 2026.
“We are in a conversation with the head of state that this is an amendment that we may carry, even regardless of the impact it will have on our revenue, because we feel it is important for the economy,” he said.
Under the proposed reforms, workers earning up to Sh30,000 monthly would pay zero income tax, up from the current threshold of Sh24,000.
The Treasury also intends to lower the PAYE rate for workers earning between Sh30,000 and Sh50,000 from the current 30pc to 25pc.
“We are proposing that from one shilling to Sh30,000, you pay 0pc, then from Sh30,000 to Sh50,000, you pay at 25pc,” Mbadi said.
According to the CS, the tax changes would create a projected revenue shortfall of approximately Sh35 billion.
“All that compounded gives a budget hole, meaning we are going to collect less by Sh35 billion,” he said.
Mbadi said the government was now evaluating whether to cut expenditure or identify alternative revenue streams to offset the expected losses.
He added that ongoing reforms at the Kenya Revenue Authority aimed at improving compliance in personal income tax and rental income tax collection could help bridge the gap.
“We were using the increased revenue collection from personal income tax out of the reforms that we are carrying out at the Kenya Revenue Authority to compensate for this,” he said.
The Treasury is currently reviewing tax collection data for March, April, and May to determine the effectiveness of the new compliance measures before making a final decision.
Mbadi’s remarks come amid growing public criticism over the exclusion of the promised PAYE relief from the Finance Bill 2026, especially as Kenyans continue grappling with rising living costs and multiple statutory deductions.
The government had initially projected that the tax changes would increase workers’ monthly take-home pay by between Sh731 and more than Sh2,000, depending on salary levels.
The Finance Bill 2026 is also targeting approximately Sh120 billion in additional revenue through expanded taxation measures affecting rent, mobile phones, alcohol, betting, tobacco, and imported goods, alongside improved tax enforcement.
The Treasury has meanwhile revised Kenya’s 2026 economic growth forecast downward from 5.3pc to 5.0pc, citing global economic instability and disruptions in international fuel markets linked to geopolitical tensions.
Inflation in Kenya rose to 5.6pc in April from 4.4pc in March, increasing pressure on households already struggling with high living costs and statutory deductions tied to housing, health insurance, and pension contributions.
