Kenya’s income tax is inequitable. The burden falls disproportionately on low- and middle-income salaried workers. Marginal tax rates rise steeply at low-income levels, while wealthier income sources are taxed at lower rates. The tax-free threshold and marginal rate bands have not been adjusted for inflation while real wages fell for five consecutive years through 2024 [i]. Though real wages recovered marginally in 2025, workers remain below their 2020 purchasing power, leaving them paying higher rates on nominally higher income with no real gains. At the same time, capital gains and dividends are taxed at minimal rates well below the 35% top rate for income tax (known as Pay As You Earn, or PAYE). Fixing this requires progressive reforms: widening PAYE bands, increasing the tax-free threshold, and raising taxes on undertaxed wealth sources.
A worker in Kenya earning KSh 32,000 per month pays the same marginal rate as someone earning 15 times more. This is because marginal rates rise rapidly and then do not rise much further at higher income levels: 10% on the first KSh 24,000, 25% on the next KSh 8,000, then 30% on income from about KSh 32,000 to KSh 500,000. Further, in Kenya’s formal workforce, 1.4 million workers- 43.8% of all formal jobs- earn under KSh 100,000 monthly yet hit that 30% rate the moment their income crosses just KSh 32,000. With the second band spanning only KSh 8,000, the system fails to provide the income differentiation that fairness, and progressive taxation, demand.
The second problem compounds the first: inflation-driven bracket creep. Because PAYE brackets and the tax-free threshold are fixed in nominal terms nominal wage growth automatically pushes workers into higher brackets despite no increase in their real incomes. This erosion has received insufficient policy attention, despite its effect on worker purchasing power. The problem is built into the system’s design, not incidental to the last five years: in any sustained inflationary period, narrow, unadjusted bands will keep quietly eroding disposable income for millions of Kenyan workers unless the bands are adjusted for inflation
Addressing these problems requires a comprehensive approach. First, PAYE reform should raise the tax-free threshold to remove the lowest earners from the tax net, addressing regressivity of steep rates at low-income levels. Second, lower tax bands must be widened to ease pressure on middle-income workers. This requires introducing additional graduated bands to be taxed at for instance 15% and 20%; which would increase PAYE progressivity. Third, the revenue gap created by these reforms can be closed by raising taxes on undertaxed wealth sources. Capital gains, rental income, and dividends are currently taxed at just 5% to 15%, well below PAYE’s top rate of 35%. These income sources accrue mainly to wealthier taxpayers. Raising their effective tax closer to the PAYE levels would improve equity and generate additional revenue without further burdening salaried workers.
National Treasury has proposed adjusting only two tax bands: widening the zero-rate threshold from KSh 24,000 to KSh 30,000 and introducing a 25% rate for the KSh 30,000–50,000 band.[ii] This is a step in the right direction consistent with the diagnosis above, but falls short of the government’s own commitment in the Medium-Term Revenue Strategy to carry out a comprehensive review of PAYE structure. The KSh 24,000 threshold would be worth approximately KSh 32,000 today if adjusted for cumulative inflation; Treasury’s proposal of KSh 30,000 therefore does not restore purchasing power to 2020 levels.
This reflects a short-term fiscal trade-off rather than administrative constraints. Treasury has the technical capacity to implement broader reform but is wary of near-term revenue loss. This concern is valid. However, revenue losses can plausibly be offset over time by raising taxes on undertaxed capital gains, rental income, and dividends.[iii] At the same time, as the additional disposable income from PAYE relief boosts consumption, it should also indirectly boost tax revenue- though the scale of these effects would require further analysis.
To sum up, PAYE reform in Kenya has been promised repeatedly but never fully delivered. Moving from promises to action means going beyond Treasury’s modest proposal to a full review of all personal income tax bands as promised by the Medium-Term Revenue Strategy. The government should consider automatically adjusting tax bands for inflation so tax burdens do not grow rapidly after any one-off reforms. This would also mean financing these changes through progressive taxation of wealth sources that currently escape meaningful taxation. The problems are clear and solutions feasible. What is missing is political will to prioritize the disposable income of Kenya’s millions of formal-sector workers over short-term revenue preservation.
This blog has been authored by Earlvin Onyango, Research Assistant at the Institute of Public Finance
[i] Business Daily 2026. Real wages grow for first time in 6 years
[ii] Nikkie Aisha. (2026). CS Mbadi Sets September Deadline for PAYE Relief Proposals.
[iii] KBA. (2026). KEPSA’S Unified Private Sector Position On The Finance Bill, 2026
