Ruto's tax cut plan a relief for workers but revenue headache for Treasury

The Pay As You Earn (PAYE) relief planned by President William Ruto’s administration may be the much-needed breather on Kenyans’ squeezed wallets even as the government now risks a sharp revenue shortfall as a result.

For an economy whose books show it is barely holding together due to compounding debt now at Sh13 trillion, a relief on PAYE, while noble to workers already cash-trapped due to new or enhanced taxes, raises questions about which other ways the hole will be filled.

This is considering a few weeks ago the Energy and Petroleum Regulatory Authority (EPRA) revised upwards the price of fuel by double digits, which may affect how much the government collects from businesses.

As one of the highlights of the Mashujaa Day celebrations held in Eldoret, Uasin Gishu County, President Ruto announced this PAYE adjustment as one of the ways his administration is working to put more money in Kenyans' pockets.

In his speech, he said the government has prepared proposals to exempt Kenyans earning Sh32,333 per month or less from Pay As You Earn income tax.

“For workers on modest incomes, every shilling saved means more money to meet their families’ needs, including food, transport, and other essentials,” he said.

“These proposals will be presented to Parliament beginning next week.”

This means the much-awaited Income Tax (Amendment) Bill that has been procrastinated  for almost a year will finally be tabled on the floor of the House to facilitate this change on incomes.

Considering the short period before the holidays, Kenyans will likely have a pay bump coming early next year.

The change in PAYE will raise the amount of income that is tax-allowable from Sh24,000 to Sh32,333. This means PAYE on any income below this amount will be zero, hence increasing the take-home pay for the majority of workers.

As such, a worker making Sh50,000 will have a take-home pay of roughly Sh43,500 after the new changes take effect up from the current Sh39,000.

For someone making Sh100,000 a month, their net pay will rise from Sh73,129 to Sh77,600 .

The underlying risk of this move, however, is the fact that National Treasury Cabinet Secretary John Mbadi revealed that the government could lose up to Sh35 billion annually as a result of these changes.

“The first simulation was that we are going to lose revenue of about Sh35 billion per year and we are looking at the economic situation as it is, and the personal income tax reforms that we have carried out at the Kenya Revenue Authority (KRA),” said Mbadi in May when he once again raised hope that the PAYE adjustment changes would be in place in the 2026-2027 budget.

The Sh35 billion dent on revenue is in addition to the Sh108 billion expected hole by slashing Value Added Tax (VAT) imposed on fuel to eight per cent from 16 per cent.

This move by President Ruto is the latest of efforts to soften the harshness of his administration’s taxes that have seemingly targeted the employed.

When he first came to office, President Ruto introduced two new tax bands of 32.5 per cent targeting workers taking home between Sh500,000 and Sh800,000 and 35 per cent for those making Sh800,000 and above.

He also introduced the Affordable Housing Levy at 1.5 per cent, Social Health Insurance Fund (SHIF) that replaced the National Health Insurance Fund NHIF) at 2.5 per cent, and enhanced the National Social Security Fund (NSSF), which saw some workers’ deductions grow by over 3000 per cent from the traditional Sh200.

Cognisant of how squeezed Kenyan workers were, his administration tabled an amendment that begot the Tax Laws (Amendment) Act, 2024, which changed how PAYE is calculated.

This amendment made deductions such as SHIF and the Affordable Housing Levy tax-deductible. This means that PAYE is calculated  after all the statutory deductions have been made and not before hence offering slight relief to some workers.

In his speech on Tuesday, he was aware of the effects of these taxes that are largely associated with his regime as he tabled his measures.

“These measures address four barriers that Kenyans confront everyday: the burden of taxation on modest incomes, the cost of acquiring property, the expense of accessing digital opportunities and the difficulty of entering the labour market,” he said.