Kenya’s Finance Bill 2025 has been passed, and the tax changes it introduces will have immediate and significant effects on your business operations. 

For CEOs, CHROs, CFOs and business leaders, understanding and adapting to these reforms is no longer optional, it’s essential to avoid costly compliance risks and to optimise your workforce and financial strategies.

Among the critical updates is the mandatory application of Pay-As-You-Earn (PAYE) tax reliefs by employers, effective July 1, 2025. 

This change aims to enhance compliance, broaden the tax base, and streamline tax processes, fundamentally altering how payroll and taxation will be managed for both employers and employees going forward.

Mandatory Automatic PAYE Relief

Under the new Kenya Finance Bill 2025, employers are required to automatically apply all eligible tax reliefs and exemptions when calculating PAYE taxes for employees. This change aims to alleviate the burden on employees who previously had to seek refunds from the Kenya Revenue Authority (KRA) due to employers omitting applicable reliefs during payroll processing.

Implications for Employers:

• Payroll System Updates: Employers must review, update, and rigorously test their payroll software to ensure that all eligible tax reliefs and exemptions are applied automatically and accurately. Failure to do so may result in payroll errors and compliance risks.
  
• Employee Record Verification: It’s critical to audit employee records and tax declarations to verify eligibility for different reliefs and exemptions, such as personal relief or insurance relief, to avoid incorrect tax deductions.
  
• Compliance & Reporting: Businesses must ensure full compliance with these new rules to avoid penalties from KRA and to simplify the tax filing and refund process for employees, ultimately improving employee satisfaction and reducing administrative overhead.

The Kenya Finance Bill 2025 marks a pivotal shift in how businesses approach taxation, payroll, and compliance. Prioritising readiness today not only ensures compliance but also positions your organisation to operate more efficiently and transparently in a changing tax environment.

Other Key Business Changes

Beyond PAYE relief, the Kenya Finance Bill 2025 introduces several other changes with implications for business operations, tax planning, and compliance structures. 

The bill reflects the government’s broader aim to modernise Kenya’s tax framework and respond to shifts in the global and digital economy. Below are the other key changes:

• Limitation on Tax Loss Carryforwards: The bill proposes a five-year cap on the carryforward of tax losses, replacing the current indefinite period. This change could impact long-term tax planning for businesses.

• Expanded Definition of Royalties: The definition of “royalty” is broadened to include payments for software distribution, potentially affecting withholding tax obligations for businesses involved in software transactions.

• Introduction of Advance Pricing Agreements (APAs): The bill introduces APAs to provide certainty for multinational enterprises regarding transfer pricing, reducing disputes and enhancing compliance. kpmg.com

• Digital Economy Taxation: The tax rate on digital assets, including cryptocurrencies and NFTs, is proposed to be reduced from 3% to 1.5% of the transfer or exchange value, aiming to spur growth in the digital economy.

• Increased Tax-Free Per Diem: The tax-free daily allowance (per diem) for employees is proposed to increase from KES 2,000 to KES 10,000, providing relief for work-related travel expenses.

While some of these reforms may appear technical, their cumulative impact on your business can be significant, especially in areas like tax planning, digital transactions, and cross-border operations. 

Conclusion

Most of the proposed changes in the Finance Bill 2025 are expected to take effect from July 1, 2025, pending parliamentary approval and presidential assent.

The Finance Bill 2025 represents a significant shift in Kenya’s tax landscape, with implications for both employers and employees. Businesses must proactively assess the impact of these changes on their operations and ensure compliance to avoid potential penalties.

For a comprehensive understanding of all proposed changes, click here access the full text of the Finance Bill 2025.

To learn about how the SeamlessHR software supports and enables you to stay compliant with payroll in Kenya, click here to book a free demo and speak to an expert.