World Bank pushes Kenya to hike PAYE to 38pc

President William Ruto at State House Nairobi where he assented to the Supplementary Appropriations Bill. [PCS]

Many salaried Kenyans could see the amount of taxes they pay significantly go up if the government adopts proposals made by the World Bank.

In the proposals-which the World Bank said could make personal income tax in Kenya equitable and yield a lower tax burden for low income earners-high-income earners will pay 38 per cent of their salaries as Pay As You Earn (Paye) tax.

In a new report on Kenya's budget and public finance, the World Bank, however, proposes reducing Paye for Kenyans earning below Sh388,000 per year or, Sh32,300 per month to 15 per cent from the current 25 per cent, a significant drop that would leave them with more disposable income.

Paye tax for Kenyans with annual salaries of between Sh388,000 and Sh2 million would also reduce to 25 per cent from the current 30 per cent if Treasury takes up the proposals.

The Bretton Woods institution, however, proposes an increase in Paye for Kenyans earning between Sh2 million and Sh6 million per year to 32.5 per cent. The current rate 30 per cent.

The World Bank also proposes an increase to 35 per cent for earners between Sh6 million and Sh9.6 million, currently paying Paye at a rate of 32.5 per cent while those earning over Sh9.6 million will pay 38 per cent from 35 per cent currently.

It noted that the increases would not lead to an increase in tax revenues but rather make taxation among salaried Kenyans equitable.

In the report, the World Bank has also advised the government to do away with the unpopular housing levy for employees earning less than Sh388,000 per year.

The levy is one of the controversial deductions that was introduced in mid-2023 and has been subjected to numerous court cases as Kenyans opposed the levy.

At some point the courts declared the levy unconstitutional owing to lack of a legal framework supporting the deductions.

"Combining the PIT rate reform with exempting low earners from the housing levy would further reduce the average tax rate for below-average wage earners while increasing the burden on top earners to 34.8 pe rcent to maintain revenue neutrality," said the World Bank in the report.

"Given the small contribution from below-average earners, shifting the tax burden from low-income earners to the top income deciles is expected to have a minimal impact on revenues, yet would make the tax system more progressive."

The World Bank noted that the Personal Income Tax (PIT) burden on lower-income individuals is disproportionately high when compared to mid- and high-income earners.

This has encouraged informality in labour relations, with job seekers avoiding being on the radar of the taxman because this significantly lowers their take-home pay.

"The tax burden disproportionately affects low-wage earners and does not rise significantly for higher earners when accounting for contributions.

"Even though the PIT structure exhibits progressivity, the average tax wedge increases steeply for low-income earners: the extra shillings they earn have a tax burden identical to that of a higher-income earner," said the World Bank, whose proposals have in the past not gone down well with Kenyans, who see the institution as among those that have been pushing the government to hike tax rates to grow revenues.

"The relatively large PIT burden on lower-income individuals encourages informality, contributing to a shrinking tax base. Kenya's tax wedge is high for a low-income household and relative to peer countries."

It noted that Kenya's tax wedge-the difference between the total labour cost and the take-home pay-is high at 19 per cent "and is more than double the tax wedge of Austria, the Netherlands, and Belgium."

It proposes the revision of taxes across the different bands, which would see high-income earners with salaries of upwards of Sh9.6 million annually pay 38 per cent in taxes.

The Bank said an alternative tax rule with revised structure can reduce the burden on low-income earners while maintaining revenue neutrality by slightly increasing the effective rate for the top earners.

"This reform results in a decreased average tax wedge for all earners except those in the top decile, with a neutral net revenue impact.