What Employers Need to Know About PAYE Changes in the Finance Bill 2025

As the Finance Bill 2025 makes its way through public consultation, employers across Kenya are taking a closer look at its proposals — especially those related to Pay As You Earn (PAYE) tax administration. One key proposal is now at the centre of HR and payroll discussions:

Employers will be required to apply all tax reliefs before deducting PAYE.

This may sound like a logical change, but it comes with its own set of compliance, administrative, and operational challenges. So, is this a step toward simplification or a source of confusion for employers?

 

 What’s Changing Under the Finance Bill 2025?

Currently, in many payroll systems, PAYE is calculated first based on gross income, and reliefs such as insurance, housing, or pension are applied afterward when employees file their individual tax returns.

Under the proposed changes:

• Employers must apply all applicable tax reliefs (e.g., personal relief, insurance relief, SHIF relief, mortgage interest relief) before calculating PAYE deductions.
• The employer becomes responsible for ensuring employees benefit from available tax reliefs automatically — not just during annual returns.

 

What Does This Mean for Employers?

 

Pros

Cons

Employee-Friendly: Workers will see more accurate take-home pay month-to-month instead of waiting for KRA refunds. Simplified Compliance for Employees: Employees won't need to claim some tax reliefs manually later. Encourages Uptake: May promote more enrolment in qualifying relief-based schemes (e.g., pension or insurance), since the benefits will be felt instantly.

Increased Payroll Complexity: Employers will need to track individual employee relief eligibility in real-time, which could complicate payroll processing. System Upgrades: Payroll software and systems will need customization or upgrades to comply with the new calculations. Data Collection: Employers may need to collect more personal and financial data from employees (e.g., mortgage or insurance documentation). Risk of Errors: Incorrect relief application could expose employers to penalties or employee disputes.

 

 

Impact on HR and Payroll Departments

This change shifts more tax administration responsibilities from the employee to the employer. HR teams will need to:

• Update internal payroll systems.
• Educate employees on submitting relevant documentation.
• Liaise more closely with tax consultants or in-house finance teams.
• Ensure timely compliance to avoid penalties from the Kenya Revenue Authority (KRA).

 

Is This a Good Thing?

The move aims to streamline payroll and ensure real-time tax fairness, but it may have mixed results depending on the size and capacity of the business:

S.No	Business Type	Likely Impact
1.	Large Corporates	Manageable with upgraded payroll systems and internal tax teams.
2.	SMEs	Potentially burdensome due to lack of automation and limited HR resources.
3.	Startups/Informal	May struggle with compliance and data collection.

 

 

Your Opinion Matters

The Finance Bill 2025 is open for public consultation, and your feedback — especially as an employer or HR professional — is vital to ensuring these changes are fair, realistic, and properly supported.

Take 2 minutes to share your thoughts via our consultation form:
[Click Here to Respond]

 

Final Thoughts

While the intention of this PAYE reform is to make Kenya’s tax system more accurate and employee-friendly, its success will depend on:

• How clearly the rules are communicated,
• Whether systems are upgraded,
• And whether employers are given the support they need to implement it smoothly.

If rolled out effectively, it could lead to greater transparency, fewer tax disputes, and higher employee satisfaction.

But if done hastily, it may lead to compliance headaches and added payroll costs — particularly for small businesses.