Good news for employees as state moves to increase tax exempt on allowances
Ideally, if the bill sails through to become law, it means employees who receive per diem payments for travel, accommodation, or other work-related expenses will be able to get up to Sh10,000 per day without paying any tax on it.
Employees who regularly travel outside their usual place of work for official duties are poised to benefit from a new tax reprieve proposed in the draft Finance Bill, 2025.
Currently under parliamentary review, the proposal seeks to increase the daily tax-exempt per diem allowance from the current Sh2,000 to Sh10,000.
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“Section 5 of the Income Tax Act is amended in item (iii) of the provision to subsection (2)(a), by deleting the words 'two thousand shillings' and substituting therefore the words ten thousand shillings,” the Bill reads.
Ideally, if the bill sails through to become law, it means employees who receive per diem payments for travel, accommodation, or other work-related expenses will be able to get up to Sh10,000 per day without paying any tax on it.
Previously, any amount above Sh2,000 was taxed, reducing the actual amount employees took home.
With the higher tax-free limit, employees will now retain more of their per diem allowance, effectively putting more money in their pockets.
This move builds on earlier reforms introduced under the Tax Laws (Amendment) Act, 2024, which raised employees’ annual ceiling for tax-exempt non-cash benefits from Sh36,000 to Sh60,000 per year.
The amendment marked a broader shift in Kenya’s approach to employee compensation, reflecting a more flexible and market-aligned tax structure for benefits and allowances.
Notably, the per diem revision is a continuation of efforts to modernise the tax code and respond to employer concerns about the rigidity of current thresholds, especially amid inflationary pressures.
Kenyan workers have been grappling with economic hardships as higher deductions from their paychecks in the past year have significantly reduced their take-home salaries.
Adding to the burden of higher deductions, many employees are still grappling with the rising cost of living.
Inflation has been on the upward trend, six months running since October last year, reaching 4.1 per cent in April.
The rising inflation levels directly impact workers' purchasing power, forcing them to spend more on daily essentials while their earnings shrink.
A report on wages in 2023 showed that real wage growth had already dipped by 4.1 per cent after adjusting for inflation, showing the broader impact on workers.
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