World Bank wants Shif, home levy relief for workers

The two levies have cut workers' take-home pay and increased staff costs as employers were required from June 2023 to match the housing levy of 1.5 percent of a worker's monthly pay.

Thousands of workers have from September last year breached the legal requirement that demands they take home at least a third of their salary following a deduction of 2.75 percent of gross pay for universal health care.

The World Bank says low-income workers should be spared the two levies amid an outcry from a large section of the population that feels burdened by new taxes.

If accepted, the recommendation will affect at least 312,018 workers in the formal sector who earn below Sh30,000 a month, accounting for 10 percent of the 3.1 million employed in the government and private companies.

“Revisit the Housing Levy, especially for employees with wages of up to Sh388,000,” the World Bank says in the 2025 Public Finance Review report.

“Consider removing SHIF contributions for low-wage formal workers. This potential reform could encourage formalisation and reduce labour market distortions, as well as cover SHIF services for poor and informal workers and low-wage formal workers, funding the gap through the budget.”

Employers say thousands of workers will take home less than a third of their pay when pre-existing loan repayment obligations are accounted for, presenting a compliance headache for managers as companies risk legal suits.

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This emerges in a period that has seen real wages fall for a fifth consecutive year, a sign of falling standards as the squeeze from living costs continues to bite.

The Employment Act of 2007 prohibits employers from deducting more than two-thirds of the basic pay of a worker to safeguard their rightful gains from employment.

The Federation of Kenya Employers (FKE) says the government has remained tight-lipped on requests for advice on how to comply with the law in the aftermath of the multiple deductions.

“The Housing Levy has a long genesis. It is relatively unpopular and civil society organisations have taken the government to court over it,” the World Bank says.

“The Housing Levy is a payroll tax that raises the relative cost of labour and thus reduces formal employment.”

The removal of Shif contributions for low-wage formal workers is seen as encouraging formalisation while reducing labour market distortions.

The World Bank wants the government to eliminate SHIF services for poor, informal workers and low-wage employees and provide extra budget support to health dockets.

The waiver of the Housing Levy and SHIF for low-wage workers and households would have the effect of putting more money into the pockets of workers by increasing the take-home pay.

People earning Sh30,000 a month would see their net pay rise by Sh956.25 to Sh27,150 from Sh26,193.75.The worker would only incur a Sh1,800 NSSF deduction before taxation and income tax of Sh1,050.

The Housing Levy, which has been deducted on monthly pay since June 2023, has been set at 1.5 per cent of gross employee salary, matched by employers.

SHIF deductions began on October 1, 2024 at 2.75 per cent of gross salary but is not matched by employers. SHIF replaced the National Health Insurance Fund (NHIF) that had been deducting employees between Sh150 and Sh1,700.

Contributions to SHIF has seen workers whose salaries range from Sh100,000 to Sh1 million part with an additional Sh1,050 to Sh25,800 for the state-backed insurance, making it the largest payslip deduction after personal income tax.

Workers in the informal sector have been mandated to contribute to SHIF but most do not, according to the World Bank.

The report notes that SHIF’s sustainability has been undermined by Kenya’s largely informal labour market even as the levy is seen as a hurdle to the creation of low-paying formal jobs.

“The payroll tax design discourages formalisation, particularly for low-wage workers and small employers who face higher costs when joining the formal sector,” the report adds.

“This creates a structural contradiction: SHIF depends on formalisation to succeed yet actively undermines it.”

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