Kenya's Finance Bill 2025/2026

🇰🇪 Understanding Kenya's Finance Bill 2025/2026: A Comprehensive Guide

The Finance Bill 2025/2026 introduces several significant tax reforms aimed at enhancing revenue collection, promoting equity, and stimulating economic growth. Let's delve into the key proposals and their implications for individuals, businesses, and various sectors.

1. MAJOR PROPOSED TAX CHANGES

a. Income Tax (PAYE) Adjustments

Revised Tax Bands: The bill proposes adjustments to the Pay As You Earn (PAYE) tax brackets to align with inflation and revenue needs:

Impact: Middle- and high-income earners will experience increased tax obligations, while low-income earners remain unaffected.

Enhanced Reliefs: Employers are now mandated to apply all deductions and exemptions before calculating tax owed, ensuring employees benefit fully from available reliefs.

b. Value Added Tax (VAT) Reforms

VAT on Digital Services: VAT on digital services is set to increase from 16% to 18%, affecting streaming platforms, online advertisements, and software subscriptions.

Expanded VAT Base: Previously exempt financial services, such as credit and debit card issuance and foreign exchange transactions, will now attract a 16% VAT.

VAT Registration Threshold: The threshold for mandatory VAT registration increases from KES 5 million to KES 8 million, easing the compliance burden on small businesses.

c. Excise Duty Modifications

Mobile Money Transfers: Excise duty on mobile money transfers rises from 15% to 20%, impacting services like M-Pesa and Airtel Money.

Digital Platform Services: A new 20% excise duty targets non-resident services offered through digital platforms, including digital lending and gaming.

Imported Agricultural Products: Excise duty is imposed on imported table eggs, onions, and potatoes to protect local farmers.

2. NEW LEVIES AND CHARGES INTRODUCED

Annual Property Tax: An annual property tax of 0.3% of the property value is proposed for residential homes in urban areas, in addition to existing county land rates.

Eco Tax on Vehicles: A KES 20,000 annual eco tax is introduced for private vehicles older than 10 years to encourage environmental responsibility.

Eco Levy on Imports: An eco levy targets imported goods with adverse environmental impacts, such as tyres, diapers, and certain electronics.

3. IMPACTS ON INDIVIDUALS, SMES, AND CORPORATIONS

a. INDIVIDUALS

Increased Tax Burden: Middle- and high-income earners will see higher PAYE deductions due to revised tax bands.

Higher Costs on Digital Services: The increase in VAT on digital services will lead to higher subscription fees for platforms like Netflix and Spotify.

Property Owners: Urban homeowners will incur additional costs due to the new annual property tax.

b. SMALL AND MEDIUM ENTERPRISES (SMES)

VAT Compliance: The raised VAT registration threshold relieves many SMEs from VAT obligations, reducing compliance costs.

Digital Economy Participants: SMEs operating in the digital space may face increased costs due to the new excise duties on digital services.

c. CORPORATIONS

Financial Services: Banks and financial institutions will need to adjust to the new VAT on services like card issuance and forex transactions, potentially passing costs to consumers.

Manufacturing Sector: Manufacturers may benefit from exemptions on inputs used in producing pharmaceuticals and animal feeds, promoting local production.

4. SECTORAL IMPACTS

a. Agriculture

Protection of Local Farmers: The imposition of excise duty on imported agricultural products aims to protect local farmers from foreign competition.

b. Education

Increased Funding: The government allocates KES 18 billion for the employment of Junior Secondary teachers, emphasizing education as a key investment.

c. Manufacturing

Incentives for Local Production: Exemptions on inputs for pharmaceuticals and animal feeds encourage local manufacturing and reduce reliance on imports.

d. Digital Economy

Taxation of Digital Services: The introduction of excise duties and VAT on digital services ensures equitable taxation of the growing digital economy.

e. Informal Sector

Compliance Relief: The increased VAT registration threshold and exemption from electronic invoicing for small businesses with turnover below KES 1 million ease compliance burdens.

5. GOVERNMENT’S FISCAL GOALS

The Finance Bill aims to:

i. Enhance Revenue Collection: By broadening the tax base and closing loopholes, the government seeks to increase revenue without introducing new taxes.

ii. Promote Equity: Adjustments in tax bands and reliefs aim to distribute the tax burden more equitably among different income groups.

iii.Stimulate Economic Growth: Incentives for local manufacturing and increased funding for education are designed to spur economic development.

6. IMPACT ON AN INDIVIDUAL EARNING KES 50,000 MONTHLY

Under the proposed PAYE adjustments:

Current Tax Rate: 25%

Proposed Tax Rate: 27.5%

Monthly Tax Increase: KES 1,250

Annual Tax Increase: KES 15,000

This example illustrates the direct impact of the revised tax bands on middle-income earners.

7. COMPARISON WITH THE 2024/2025 FINANCE BILL

Avoidance of New Taxes: Unlike the previous year, the 2025/2026 bill avoids introducing new taxes, focusing instead on improving tax administration.5

Public Response: The 2024/2025 bill faced significant public backlash, leading to the withdrawal of proposed tax increases worth KES 346 billion.

8. CONTROVERSIAL PROPOSALS AND PUBLIC REACTIONS

Access to Financial Data: A proposal granting the tax authority access to individuals' and businesses' financial data has raised privacy concerns.

Eco Levy on Essential Items: The eco levy on products like diapers and sanitary pads faced criticism for potentially increasing the cost of essential goods. The government has since amended the proposal to apply only to imported products.

Tax on Specialized Hospitals: A 16% tax on goods and services for constructing specialized hospitals has sparked concerns about rising healthcare costs.

📚 Conclusion

The Finance Bill 2025/2026 presents a strategic approach to tax reform, focusing on enhancing revenue collection, promoting equity, and stimulating economic growth. While it introduces measures to ease compliance for small businesses and incentivize local manufacturing, certain proposals have sparked public debate. As the bill undergoes parliamentary scrutiny, stakeholders are encouraged to engage in constructive dialogue to ensure the final legislation balances fiscal objectives with the welfare of all Kenyans.