Kenya’s powerful banking sector has thrown down the gauntlet to the National Treasury, issuing a fresh set of demands to overhaul the Pay As You Earn (PAYE) tax structure. In a move that signals a deepening rift between the private sector and the state over fiscal policy, banks are pushing for the tax-free salary threshold to be raised to Ksh 40,000, arguing that the current tax regime is strangling the workforce and stifling economic demand.

The demand follows a recent, albeit limited, move by the government to slash PAYE for the lowest earners, exempting those earning below Ksh 30,000. However, the Kenya Bankers Association (KBA) and the Kenya Union of Savings and Credit Cooperatives (KUSCCO) insist this does not go far enough. They are lobbying for a comprehensive restructuring that would see the tax-free band expanded to Ksh 40,000 and the top tax rate capped at 30%, a direct challenge to the government's aggressive revenue collection strategy.

The Economics of Survival

The logic behind the banks' demand is simple: disposable income has collapsed. "Official data shows Kenyan workers have endured five consecutive years of real pay losses," a KBA report highlights. Inflation, coupled with new statutory deductions for housing and health (SHIF), has eroded the purchasing power of the average Kenyan to dangerous levels. Banks are feeling the pinch as loan defaults rise and savings dwindle. By putting more money in workers' pockets, they argue, consumption will rise, ultimately boosting the economy and, ironically, tax revenues through VAT.

The Treasury, however, finds itself in a bind. Under pressure from the IMF to widen the tax base, any concession on PAYE is seen as a fiscal risk. Yet, the political optics of overtaxing an already burdened populace are becoming untenable. The banks' intervention provides a powerful corporate voice to the public outcry, framing tax relief not just as a welfare issue, but as an economic imperative.

• The Proposal: Raise tax-free income to Ksh 40,000. Cap the maximum PAYE rate at 30% (down from the current high bands which can hit 35%).
• The Rationale: Real wages have fallen by over Ksh 6,805 in recent years due to inflation. Tax relief is the only immediate lever to restore purchasing power.
• The Opposition: The Treasury argues that tax cuts must be matched by spending cuts, a difficult proposition in a budget-deficit environment.

A Looming Standoff

This push by the banks is more than just a policy proposal; it is a warning. The financial sector is the engine of the economy, and when it flags that the tax burden has become unsustainable for borrowers and savers alike, the government must listen. As budget discussions for the next fiscal cycle heat up, the battle lines are drawn.

Will President Ruto’s administration bow to this pressure and offer a lifeline to the middle class, or will they double down on austerity? For the Kenyan worker, staring at a payslip that shrinks every month, the outcome of this showdown will determine whether they can survive the next financial year.