The Finance Act, 2026 (“the Act”) was assented to by the President on 23 June 2026 and Gazetted on 26 June 2026.
The Act introduces a wide range of amendments to Kenyan tax laws, primarily aimed at broadening the tax base and accelerate revenue collection to support the Government’s KES 3.63 trillion revenue collection target. The key legislation amendments directly impact the Income Tax Act (ITA), the Value Added Tax Act (VAT Act), the Tax Procedures Act, the Excise Duty Act, and the Miscellaneous Fees and Levies Act.
The most significant change in employment taxation is the change of annual individual income tax return filing deadline from 30 June to 30 April. In addition, the Act introduces several amendments that impact both employers and employees, that have implications on payroll administration, employment tax compliance, reporting obligations, and the taxation of employee remuneration and benefits.
Whilst most of the amendments came into effect on 1 July 2026, certain provisions will take effect on 1 January 2027.
This bulletin presents a high-level summary of the key employment tax amendments and highlights their potential impact on employers and employees in Kenya
Annual self-assessment return filing timelines—individual filing deadline moved to 30 April
The Act amends Section 52B (1) of the Income Tax Act to require every individual chargeable to tax to file an annual return, including a self-assessment of tax from all sources, by the last day of the fourth month following the end of the year of income. Consequently, individuals are now required to file their annual income tax returns by 30 April, while companies and other non-individual taxpayers will continue to file by the last day of the sixth month following the end of their accounting period.
The amendment brings forward and shortens the annual filing deadline for individual taxpayers by two months. This means a four-month period for preparation and filing of tax returns compared to the previous framework of six months. Individuals should therefore start their tax compliance processes immediately in January of each tax year to ensure they have sufficient time to meet the revised filing compliance deadline. This new amendment takes effect on 1 January 2027.
Extension of tax amnesty on interest, penalties, and fines relating to unpaid taxes
The amendment has extended the tax amnesty framework by shifting the cutoff date for qualifying tax debt from 31 December 2023 to 31 December 2025 and extending the deadline for settlement of outstanding principal tax from 30 June 2025 to 31 December 2026.
A Tax amnesty is a limited-time bound opportunity offered by the government that allows taxpayers to regularize any outstanding tax obligations, e.g. unfiled tax returns and unpaid tax liabilities. Under this extended framework, taxpayers who have outstanding tax returns and/or outstanding principal tax liability are encouraged to fulfill their obligations by 31 December 2026 and automatically qualify for a waiver of all accrued penalties and interest. This amnesty applies to tax liabilities that relate to periods ending on or before 31 December 2025.
The amnesty grants individual taxpayers an opportunity to voluntarily declare and regularize any historical unpaid taxes. It shields taxpayers from any potential legal charges that may stem from any non-compliance within the period covered under the amnesty. Once a taxpayer declares, there is an automatic waiver of penalties and interest. Tax amnesty generally encourages voluntary compliance and boosts the taxpayer’s cash flow by the waiver of penalties and interest burden. It also gives the taxpayer slightly more time to settle any outstanding principal tax.
In the past, the government of Kenya has used tax amnesties to bolster tax compliance, enhance tax collection and widen the tax base. This amnesty is no different; it is expected to enhance the KES 3.63 trillion revenue collection target and to also fund the government’s ambitious 2026/2027 budget.
Taxation of gratuity
The Act has amended Section 5(4) of the Income Tax Act by inserting a new paragraph (ga), introducing an additional exemption for contributions towards gratuity in respect of employment or services rendered, provided that:
This amendment encourages employers to provide fair and well-structured gratuity benefit schemes under long-term employment arrangements. This is a welcome amendment, as it is likely to encourage employees to remain in employment for longer periods, enabling them to accumulate higher levels of tax-exempt employer gratuity contributions over time.
Employers are encouraged to review and assess their gratuity policies to ensure alignment with the revised provisions. This is to ensure that the benefits that accrue are well structured and administered in accordance with the applicable tax legislation and treatment.
Tax exemption for pensions benefits paid upon death
The Act introduced an amendment to the First Schedule to the Income Tax Act that exempts portions of pension benefits paid to the beneficiaries of a deceased registered member.
This amendment provides tax relief to the beneficiaries of deceased members by ensuring that they receive the full value of the inherited benefit while also simplifying administration and tax reporting.
Employment income of non-resident employees of a Kenyan designated national carrier—exemption from taxation
The Act has amended Section 5 of the Income Tax Act by inserting a provision that states that income earned by a non-resident individual employed by, or engaged on behalf of, a resident air transport operator designated as a national carrier shall not be deemed to accrue in or be derived from Kenya to the extent that:
The amendment excludes from tax a non-resident individual’s employment income whose duties are deemed to be performed outside Kenya for a resident air transport operator designated as a national carrier. This is likely intended to enhance the competitiveness of the national carrier in attracting and retaining international talent, while reducing the potential for unintended Kenyan tax exposure in respect of income earned outside Kenya.
Other employment-related tax changes
VAT treatment of employment costs in outsourced payroll and labor outsourcing arrangements
The Act amended in Section 13 of the Value Added Tax (VAT) Act to deem employee-related costs incurred by suppliers of labor outsourcing or employee placement services as disbursements made on behalf of the client.
The amendment clarifies that total employment costs incurred under outsourced payroll or Employer of Record (EOR) arrangements including salaries, wages, statutory deductions, and other employee-related costs may be treated as disbursements and excluded from the taxable value of the supply for VAT purposes. Consequently, only the service or management fees charged by the service provider should be subject to VAT at the standard rate.
This is a welcome clarification, as there has historically been differing interpretations and uncertainty regarding the VAT treatment of employment-related costs under outsourced payroll and Employer of Record (EOR) arrangements.
The use of outsourced payroll service providers and Employer of Record (EOR) arrangements has increased significantly in Kenya in recent years, driven by the need for efficient payroll administration and compliance with local employment tax obligations.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Andrew Ondieki
Director
Kennedy Kyalo
Senior Manager
Mercy Migwi
Manager
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