Workers earning below Sh50,000 have been dealt a blow after the government dropped its promise to cut income tax, which was expected to ease pressure on take-home pay amid persistent inflation.
The long-awaited relief, which had been anticipated by salaried employees struggling with the rising cost of living, has now been excluded from the Finance Bill, 2026, leaving millions of workers facing continued deductions from their pay.
Instead, Treasury Cabinet Secretary John Mbadi has shifted focus to widening the tax base through new levies on rent, mobile phones, alcohol, tobacco and betting, as the government seeks to raise Sh120 billion under the Finance Bill, 2026.
This marks a sharp jump from the Sh30 billion targeted under the Finance Act, 2025.
The National Treasury is also counting on an additional Sh81 billion from intensified efforts to curb tax evasion, with the Kenya Revenue Authority expected to collect Sh2.985 trillion in the financial year starting July, up from Sh2.784 trillion.
For workers who had hoped for higher disposable incomes, the reversal means continued strain on household budgets that have already been eroded by inflation over the past five years.
Mbadi had previously promised that salaried employees earning Sh50,000 and below would benefit from PAYE adjustments that would have increased net pay by between Sh731 and Sh2,127 under revised income tax brackets aimed at cushioning inflation.
The Treasury had initially prepared a Tax Laws (Amendment) Bill, 2026, to implement the cuts but later shelved it, opting instead to fold the proposals into the Finance Bill, 2026. However, the final Bill now before Parliament does not include the relief measures and is expected to be passed by the end of June.
“We, however, had to set this aside because we just have a few weeks to Finance Bill, 2026, so bringing some tax law adjustments at this time would be too close to the Finance Bill,” Mbadi told the National Assembly Budget and Appropriations Committee on March 31.
“We would rather review all this and consolidate and bring them together as opposed to having two separate Bills.”
The policy reversal means workers earning below Sh50,000 will continue paying current PAYE rates even as inflation rose to 5.6 per cent in April, up from 4.4 per cent in March, driven largely by higher fuel prices linked to the Iran conflict.
At the same time, the Treasury is proposing higher taxation across several sectors. Rental income tax is set to rise from 7.5 per cent to 10 per cent, a move that could push landlords to increase rents.
A five per cent tax on second-hand clothes and shoes has also been introduced, alongside 16 per cent VAT on locally assembled mobile phones.
Mobile phone users could also face higher prices after excise duty is proposed to increase from 10 per cent to 25 per cent, with importers expected to pass the cost to consumers.
The shift marks a departure from earlier reforms under former President Mwai Kibaki, whose administration had reduced taxes on mobile phones in the mid-2000s to promote digital access and affordability.
Most excise duty changes in the Finance Bill target alcohol, tobacco and imported goods from East African Community member states.
Excise duty on ethanol has been reduced from Sh500 per litre to Sh88 per litre, as the government seeks to broaden taxation beyond licensed spirits manufacturers. However, this is expected to affect producers of pharmaceuticals, sanitisers, cosmetics and industrial chemicals, with potential knock-on effects on hospitals, drug makers and manufacturers.
Small independent brewers producing alcohol below six per cent content, who previously paid a reduced rate of Sh10 per centilitre instead of Sh22.50, may now be required to pay the full excise duty after the exemption is removed.
The Finance Bill also introduces excise duty on products such as paper, furniture and glass imported from East African Community countries, a move likely to spark tensions within the regional bloc over non-tariff barriers.
Higher excise duties are also proposed for cigarettes and other nicotine products as the government shifts focus to raising revenue from sin taxes amid declining alcohol revenues and rising health concerns.
However, the ambitious revenue targets face uncertainty due to global economic pressures, including the US-Israel war against Iran, which has disrupted energy markets.
Kenya, which relies heavily on imported fuel, is already grappling with price instability and supply concerns, factors expected to increase inflation and slow economic growth.
The National Treasury has revised its 2026 growth projection from 5.3 per cent to five per cent and warned that the outlook could worsen if the conflict persists.
Earlier in February, Mbadi had indicated that a Tax Laws (Amendment) Bill would raise the tax-free income threshold from Sh24,000 to Sh30,000, while income between Sh30,000 and Sh50,000 would be taxed at 25 per cent.
Under those now-shelved proposals, a worker earning Sh30,000 would have taken home an extra Sh731.25 monthly, raising net pay to Sh26,925 after deductions.
Those earning Sh35,000 would have gained about Sh1,500 more, increasing net pay to Sh31,059.38, with PAYE reduced from Sh1,853.13 to Sh353.13.
Workers earning Sh50,000 were expected to gain up to Sh2,127.10, pushing monthly net pay to Sh41,156.25.
The government has recently faced pressure to review statutory deductions, including contributions to the National Social Security Fund, the Social Health Insurance Fund and the Affordable Housing Levy.
The Kenya Bankers Association has proposed a uniform 5.0 per cent reduction in PAYE across all tax bands.
Despite a slight improvement in real wages to Sh56,566 in 2025 from Sh55,450 in 2024, earnings remain below the 2020 level of Sh62,256.
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