Kenya’s high tax wedge will hit the country harder, pushing the majority of workers out of formal employment, with most being up in the informal sector in a bid to have a higher take-home.   

Data from the World Bank’s most recent report has noted that Kenya’s Tax wedge has even surpassed a couple of major economies, currently standing at 19 per cent of the gross domestic product (GDP).   

The tax wedge is the difference between the labour cost and the take-home salary, or what an employee takes home after all the statutory deductions.

“Kenya’s tax wedge of 19 per cent is estimated to be higher than in many countries and is more than double the tax wedge of Austria, the Netherlands and Belgium, among others,” the report highlights.   

Currently, employed Kenyans are subjected to tax deductions of up to 50 per cent of their gross salary, according to the Federation of Kenyan Employers (FKE).

This comprises of deduction for the housing levy at 1.5 per cent, NSSF at six per cent, SHIF at 2.75 per cent and the PAYE ranging between 10 per cent and 32.5 per cent depending on the income bracket.  

“Clearly if you continue raiding the pay slip, it means we will not have any income to take home, employees will have to keep on borrowing, they will be distressed, and that translates to social unrest, and then people start to wonder what is the value of being in employment. In our calculations, about 45 to 50 per cent of employees’ income is going to tax,” FKE chief executive Jacqueline Mugo said during a previous interview.

It is highlighted that Kenya’s tax wedge follows that of France, Portugal, Norway and Georgia at a closer rate.   

What the high tax wedge does to the country, according to the Bretton Woods institution, is that it creates a larger percentage of the informal sector while creating minimal space for employers in the formal space to hire low-wage workers.  

“Such a high tax wedge discourages workers in Kenya from seeking formal employment, and employers have fewer incentives to formally hire low-wage workers, potentially leading to more informal work in the economy,” the lender highlights.   

The global lender further points out that the low-income earners in the country grapple with high statutory deductions, which do not rise significantly for higher earners when accounting for contributions.

It explains that for every extra shilling that they get, the tax that it is subjected to is similar to that of high-income earner,s which creates an imbalance.   

“For example, an individual earning near the minimum wage has a tax wedge (including employer social security contributions) of about 15 per cent, which nearly doubles to 27 per cent for those earning closer to the average wage,” the bank illustrates.  

Past the quoted rates, the increase is modest, with individuals earning five times the average income facing a 32 per cent tax wedge, as marginal tax wedge calculations show a flat rate for those earning between half and seven times the average income.   

This, in their vie,w indicates that the tax burden fails to rise significantly for higher income earners, leading to a less steep progression in tax rates for higher income brackets and a substantial tax burden for lower earners.  

In light of this, the bank offers an alternative that the country can adopt to address this imbalance.  

It proposes that the rate for the annual wage for Kenyans under the income bracket of between Ksh0 and Ksh288,000 be retained at the rate of 10 per cent but that of those under the bracket of between Ksh288,000 and Ksh388,000 be lowered from the current 25 per cent to 15 per cent noting that the current rate is too stiff for Kenyans under the relevant tax bracket.   

For those earning between Ksh388,000 and Ksh2 million, the lender now proposes the 25 per cent Marginal Personal Income Tax rate, followed by a 32 per cent rate for those earning from Ksh2 million to Ksh6 million.   

At the same time, the bank proposes a 35 per cent rate for those earning between Ksh6 million and Ksh9.6 million from the current 32.5 per cent and a 38 per cent rate for income above Ksh9.6 million from the current 35 per cent.   

“This reform results in a decreased average tax wedge for all earners except those in the top decile, with a neutral net revenue impact. Such policy reform suggests there is potential to redistribute the tax burden to make the system more progressive,” the banks propose.   

Disposable income

While there are no new taxes in the coming Finance Bill for Kenyans, according to the National Treasury Cabinet Secretary, John Mbadi, the Institute of Public Finance (IPF) also proposes a similar reform, wanting sector-specific deductions to be slashed in tandem in a bid to increase Kenyans’ disposable income.   

While presenting their views on the proposed finance bill 2025/26 before the National Assembly Departmental Committee on Finance and National Planning, Daniel Murakaru, IPF legal researcher proposed that the rates should be lowered considerably to this effect in a bid to match with the current economic realities that majority of the Kenyans are currently grappling with.     

“We appreciate the initiative that is being taken towards ensuring that we increase the disposable income of various employees who pay the pay-as-you-earn. However, while this is a measure that is going in the right direction, it falls short of addressing the larger issues whereby most employees are still significantly receiving less disposable income,” he said.     

The researcher highlighted that this World Bank report puts pressure on the need for the country to ensure that the rate is proportional to the current economic state.

“So, it’s a high need for us to consider the pay as you earn funds even as we continue to try to increase the disposable income to the common citizen,” he emphasised.