Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Payroll taxes stall as employers cut back hiring, recruit casuals
About 90 percent of jobs created were from the largely unregulated informal sector, underlining the difficulties of corporate Kenya in creating quality employment for thousands of graduates leaving universities and colleges annually.
Collections from payroll taxes in the financial year ended June 2025 grew at the slowest pace since the Covid pandemic, exposing challenges in Kenya’s job market, which is struggling to create new opportunities and raise pay.
Fresh numbers from the National Treasury show receipts from pay-as-you-earn (Paye) on workers’ salaries, wages, and allowances—the single largest source of tax revenue—grew to Sh560.50 billion from Sh554.65 billion in the year ended June 2024.
The measly 1.05 percent year-on-year growth points to a sharp reversal from the double-digit expansion of recent years, and reflects the weak expansion posted in the pandemic period when there were mass layoffs and pay cuts.
The performance last fiscal year was the worst since 2019-20, when payroll taxes rose a marginal 1.46 percent to Sh399.20 billion before contracting 8.98 percent to Sh363.34 billion in the 2020-21 financial year when the Covid-19 pandemic shutdowns most impacted the job market. The Kenya Revenue Authority (KRA) earlier attributed the weak performance in Paye partly to “effects of ongoing restructuring by various organisations to manage operational costs, etc”.
The 2025 Economic Survey findings suggested that new job openings fell in the year ended June 2024, narrowing opportunities for workers seeking to change work in the hope of better pay.
New employment dropped to about 782,300 from 848,100 new hires in 2023, the lowest since the 2020 Covid-19 pandemic, with the economy creating 75,000 formal jobs compared to 122,900 the year before.
About 90 percent of jobs created were from the largely unregulated informal sector, underlining the difficulties of corporate Kenya in creating quality employment for thousands of graduates leaving universities and colleges annually.
The growth in Paye was also blunted by the increasing number of companies using refunds rather than fresh cash payments to offset payroll taxes.
Businesses in the financial year ended June tapped a record Sh49.67 billion in refunds — nearly double the Sh24.85 billion utilised a year earlier — to pay corporate tax, Paye, and VAT.
About one-fifth of that, or Sh10.4 billion, went directly to settling payroll taxes, the KRA reported.
“Section 47(2)(b) of the Tax Procedures Act, Cap 469B, stipulates that approved claims not settled within six months shall be offset against existing and future tax liabilities,” KRA Commissioner-General Humphrey Wattanga wrote in a press statement in July.
“In line with this provision, adjustment vouchers amounting to Sh49.673 billion were utilised by taxpayers to settle tax obligations across various tax heads in FY [financial year] 2024-25. This reflects a significant increase from Sh24.845 billion utilised during the corresponding period in the previous financial year.”
While the law allows such offsets, the sheer scale underscores how companies — squeezed by high borrowing costs, weak demand, and a heavy tax burden — are increasingly relying on “paying taxes with taxes”.
This has seen the Treasury limit the scope after it advised the KRA against modifications on its online portal, iTax, to allow users to use claims of excess tax payments to offset their dues, fearing the impact on fresh revenues.
“The National Treasury has clarified to KRA that offsets under Section 47(1)(a) should apply only to taxes borne by the taxpayer and not the tax liabilities of third parties withheld by taxpayers, such as withholding VAT and withholding income taxes,” the Treasury said in response to the Business Daily’s queries.
“Withholding taxes are an administrative obligation of the withholding agent who collects tax from another party and remits it to KRA. The actual liability rests with the payer (employee in case of PAYE, supplier or service provider) and not the withholding agent.”
The growth of Paye has also been blunted to a small extent by changes in the Tax Amendment Act 2024, enforced on December 27, shifting the Social Health Insurance Fund (SHIF) and the Housing Development Levy to pre-tax allowances from post-tax reliefs. That lowered taxable incomes, trimming Paye receipts.
The challenge of growth in payroll collections has also been compounded by the continued government freeze on new employment since 2023, save for the security, education, and health sectors. The moratorium has been renewed over the years, with the Treasury maintaining the need to complete a comprehensive payroll audit to weed out ghost workers and enforce proper pay scales in the public sector.
In the private sector, firms have complained of rising costs of doing business and a “multitude” of taxes and levies that have eroded margins. This has prompted some of them to cut staff and freeze hiring on permanent and pensionable terms, while some businesses have shifted operations to the informal jua kali sector, where Paye compliance is low.
“Many businesses, especially the MSMEs [micro-, small- and medium-sized enterprises] cannot afford the costs associated with operating in the formal employment sector. This has led to the growth in the number of unemployed Kenyans as many employers try to manage their costs,” Jacqueline Mugo, the executive director for Federation of Kenya Employers, said in an earlier interview.
“The greater concern is the living standards of our employees, that is deteriorating because of enhanced deductions, which is making them start to wonder about the value of being in employment. Clearly, if we continue raiding the pay slips, it means we will hardly have any money to take home. So they [employees] will keep on borrowing, and they will be distressed, and that eventually translate."
