IPF also argued that giving workers more disposable income could increase household consumption Under the current PAYE structure, income up to Sh24,000 is taxed at zero rate The Institute of Public Finance is now calling for a comprehensive overhaul of Kenya’s Pay As You Earn (PAYE) system, saying the current tax structure is placing a disproportionate burden on low- and middle-income salaried workers.
The think-tank said workers have continued to pay higher taxes on nominally higher incomes even as their purchasing power remains below 2020 levels. IPF research assistant Earlvin Onyango said the failure to regularly adjust tax bands and the tax-free threshold for inflation has resulted in bracket creep, pushing workers into higher tax rates without corresponding real income gains.
Bracket creep is a process where inflation pushes your nominal salary into a higher tax bracket, even though your actual purchasing power has not increased. “Kenya’s income tax system is inequitable because the burden falls disproportionately on low- and middle-income salaried workers.
the current structure sees marginal tax rates rise sharply at relatively low-income levels, while income from wealth, including capital gains and dividends, is taxed at lower rates,” Onyango said. Under the current PAYE structure, income up to Sh24,000 is taxed at zero rate, while the next Sh8,000 is taxed at 25 percent.
Income above Sh32,000 and up to Sh500,000 attracts a 30 percent marginal rate. This means a worker earning Sh32,000 and another earning substantially more can face the same marginal tax rate once their income crosses the Sh32,000 threshold. IPF said about 1.4 million workers, representing 43.8 per cent of Kenya’s formal jobs, earn less than Sh100,000 a month yet enter the 30 per cent tax band once their income exceeds Sh32,000.
Onyango said the narrow tax bands fail to adequately differentiate between taxpayers based on their ability to pay. “The problem is built into the system’s design. In any sustained inflationary period, narrow and unadjusted bands will continue eroding disposable income for millions of Kenyan workers,” he said.