Payslip effects of Ndungu’s two new Tax bands

Once new top tax bands proposed by the National Treasury take effect with the passage of the Finance Bill 2023, Kenya’s top earners who earn between Sh800,000 and Sh1 million per month in salaries will see their tax obligations rise by between Sh7,500 and Sh17,500 per month.

However, because fewer than 1% of workers in the economy make over $100,000 per year, the government’s revenue from these enhanced tax bands will be constrained relative to the Sh1.19 trillion in income taxes that are anticipated to be collected overall in the upcoming fiscal year.

In line with the suggestions made by the Parliament’s Budget and Finance Committee in its report on the Bill, Treasury CS Njuguna Ndung’u on Thursday announced new tax bands imposing a 32.5 percent PAYE [Pay-as-You-Earn] rate on income falling between Sh500,000 and Sh800,000 and 35 percent for all pay above this threshold.

Twenty percent of all workers are subject to the highest tax rate of 30 percent under the current tax bands, which is imposed on all pay above Sh32,333 per month. Earnings between Sh24,000 and Sh32,333 are subject to a 25 percent tax rate, or Sh2,083 per month.

Because the government provides a relief or refund equal to the Sh2,400 that is levied on this amount, the lowest tier of the tax scale (Sh24,000 and below) is effectively exempt from taxation (42.5 percent of workers).

“The tax structure is regressive as an individual employee earning incomes above Sh32,333 per month falls within the upper tax band at the rate of 30 percent leaving no significant gap between employees who do not pay tax as a result of tax relief and those earning higher incomes,” said Prof Ndung’u.

“We shall continue to review that PAYE structure to make it more progressive,” he added.

Kenyans making Sh800,000 per month will now pay Sh242,283 in total PAYE before relief, up from Sh234,783 previously, under the new top band of 32.5 percent.

The additional two PAYE bands on their pay cause the tax obligation for those making Sh1 million to increase to Sh312,283 from Sh294,783, which was the previous amount.