KRA Issues New PAYE Compliance Directive

The Kenya Revenue Authority (KRA) has issued a public notice to employers, employees, and the general public regarding the mandatory application of income tax deductions, reliefs, and and exemptions. The directive, issued on Thursday, October 2, 2025, takes immediate effect and is a direct consequence of amendments to the Income Tax Act, Cap 470, through the Finance Act, 2025.

This move by the KRA aims to streamline the computation of Pay As You Earn (PAYE) for employee emoluments, ensuring that all eligible tax benefits and statutory requirements are accurately reflected. Employers are now legally obligated to factor in these provisions, which include personal relief, insurance relief, mortgage interest deductions, and contributions to registered pension schemes and Post-Retirement Medical Funds.

Context of the Finance Act, 2025

The Finance Act, 2025, assented into law by the President on June 27, 2025, and subsequently published in the Kenya Gazette, introduced a wide range of changes to Kenya's tax laws. While previous Finance Acts often focused on significant changes for salaried individuals, the 2025 Act primarily seeks to broaden the tax base to meet an estimated revenue target of KES 3.32 trillion. The Act's provisions generally came into effect on July 1, 2025, with some exceptions slated for January 1, 2026.

Among the key changes in the Finance Act, 2025, are the expansion of the per diem benefit from KES 2,000 to KES 10,000 and the limitation of carrying forward tax losses to five years. The Act also repealed the Digital Assets Tax under the Income Tax Act, replacing it with a 10% excise duty on fees charged on virtual asset transactions by virtual asset providers.

Employer and Employee Obligations

Under the new KRA directive, employers are specifically required to:

• Apply personal relief to all resident employees as stipulated in the Income Tax Act.
• Allow insurance relief, mortgage interest deductions, and contributions to registered pension schemes and Post-Retirement Medical Funds, provided these are declared by the employee, supported by necessary documentation, and fall within statutory limits.
• Deduct statutory levies and contributions paid by employees, such as the Affordable Housing Levy and contributions to the Social Health Insurance Fund, in accordance with the Act.
• Recognise and apply tax exemptions for employees holding valid tax exemption certificates, subject to prescribed limits.

The KRA has also emphasised the importance of accurate and timely submission of PAYE returns, reflecting all applicable reliefs, deductions, and exemptions. Employees are advised to promptly provide their employers with all required documentation to support claims for deductions and reliefs.

Stakeholder Implications and What to Watch

This directive is expected to influence public debate and policy execution, with stakeholders urging for further clarity on implementation timelines, associated costs, and safeguards. The KRA's move underscores a broader governmental fiscal policy for the Financial Year 2025/26, which focuses on fiscal consolidation to reduce public debt and allocate resources for essential public services.

The KRA has invited interested members of the public, professionals, and stakeholders to submit their inputs and comments for consideration in the finalisation of related regulations. Draft regulations have been posted on the KRA website, with submissions to be received by October 7, 2025.

Evidence/Data

• Date of KRA Public Notice: October 2, 2025
• Effective Date of Directive: Immediately
• Legislation: Finance Act, 2025, amending the Income Tax Act, Cap 470
• Finance Act, 2025 Assent Date: June 27, 2025
• General Effective Date of Finance Act, 2025: July 1, 2025 (with exceptions)
• Estimated Revenue Target (FY 2025/26): KES 3.32 trillion
• Per Diem Benefit Increase: From KES 2,000 to KES 10,000
• Tax Loss Carry Forward Limit: Five years
• Digital Assets Tax: Repealed and replaced with 10% excise duty on virtual asset transaction fees
• Deadline for Public Submissions on Draft Regulations: October 7, 2025