Employment Tax

Kenya | The Finance Act, 2025 highlights

Summary

The Finance Act, 2025 (“the Act”) was assented to by the President on 26 June 2025, following the tabling of the Finance Bill (“the Bill”), 2025, before the National Assembly on 30 April 2025. The Act introduces a range of amendments to Kenya’s tax legislation, primarily aimed at expanding the tax base to support the government’s revenue target of KES 3.385 trillion. Key amendments affect the Income Tax Act, Value Added Tax Act, Tax Procedures Act, Excise Duty Act, and the Miscellaneous Fees and Levies Act.

Unlike the heavily contested Finance Bill, 2024, the 2025 legislation introduced minimal changes related to employment taxes.

On 19 June 2025, Parliament’s Finance Committee proposed significant revisions to the Bill, including the removal of a controversial clause that would have granted the Kenya Revenue Authority unrestricted access to taxpayer data amid widespread concerns over data privacy and constitutional rights. The National Assembly approved the revised version, which was subsequently signed into law.

This bulletin provides a high-level overview of the changes impacting employment taxation and their potential implications for employers and employees in Kenya. With the Finance Act, 2025 now in force, the amendments take effect from 1 July 2025.

The detail

Per diem adjustment

KES 10,000 per diem

Previously, the first KES 2,000 per day, paid to an employee working out of station or outside their usual workplace while on official duties to cater for subsistence, travelling, entertainment or other out of pocket expenses was deemed reimbursable and not subject to tax. With the enactment of the Finance Act, 2025 this tax-free threshold has increased from KES 2,000 to KES 10,000 per day. This amendment serves as an incentive for employers by simplifying expense management and reducing taxable benefits concerns related to out-of-station allowances. Additionally, the previous KES 2,000 limit was often too low to cover the actual daily expenses incurred during such assignments, so this increase is a relief to employees working away from their employer’s premises by allowing a higher daily amount to meet these costs.

Tax exemption for gratuity payments

Exemption of gratuity from tax

The Act has amended the First Schedule to the Income Tax Act (ITA), and exempted from tax, gratuity payments made under private schemes.

Previously, only the gratuity payments or other allowances paid under a public pension scheme were exempt from tax. Gratuity payments made under private schemes were not exempt from tax. This amendment provides that gratuity payments from both public and private schemes are exempt from tax.

Application of all allowable deductions, relief and exemptions

Allowable deductions, reliefs and exemptions

The Act has introduced an amendment to the ITA that requires employers to grant employees all applicable deductions, reliefs and exemptions provided for in the ITA.

This will help to ensure accurate determination of net take-home pay for employees and significantly reduce administrative burden to include potential post-year tax refund claims from employees whose taxes may be overpaid.

Taxability of income accrued in and derived from Kenya

Tax treatment of certain non-citizens

The Act has amended Section 15 of the ITA by deleting the paragraph that allowed a deduction for an amount equal to one-third of the total gains and profits from employment of an individual who is not a citizen of Kenya and:

1. Whose employer is a non-resident company or partnership trading for profit
2. Who is in Kenya solely for the performance of his duties in relation to his employer’s regional office, which office has been approved for the purposes of this paragraph by the Commissioner
3. Who is absent from Kenya for the performance of those duties for a period or periods amounting in the aggregate to one hundred and twenty days or more in that year of income
4. Whose gains and profits from that employment are not deductible in ascertaining the total income chargeable to tax under this Act of his employer or of any company or partnership which controls, or is controlled by, that employer

With this amendment, the total income of such individuals accrued in or derived from Kenya will be fully taxable, aligning with the principle that all income earned from sources within the country is taxable.

Deduction of mortgage interest for self-built homes

KES 360,000 per annum allowable for construction of own-occupied homes

With the enactment of the Finance Act, 2025, interest incurred during the construction of owner-occupied homes shall be allowed for deduction against taxable income. Previously, this deduction only applied to interest on loans for the purchase or improvement of premises. Individuals who borrow to construct their own homes are now eligible for deduction of interest against taxable income to a maximum of KES 360,000 per year.

This is a welcome amendment as it will encourage home construction and stimulate growth in the residential construction sector.

Tax treatment of pension incomes

Pension incomes and lump sum payments

The Act has introduced several amendments to Section 8 of the ITA, summarized as follows:

• The word “husband” in subsection (1) is deleted and replaced with “spouse.”
• Deletion of subsection (4), which exempts from tax the first KES 300,000 of pension and retirement annuities received by a resident individual from a registered pension fund or the NSSF.
• Deletion of subsection (5), which exempts certain lump sum payments and pensions from tax—such as the first KES 600,000 from registered retirement and provident funds—subject to specified conditions.
• Deletion of subsection (6), which exempts pension income and lump sum payments to beneficiaries.
• Deletion of subsection (7), which addresses the treatment of benefits in the event of the death of a beneficiary to a registered individual retirement fund.
• Deletion of subsection (9), which provides that if an individual retirement fund ceases to comply with registration rules, its balance shall be included in the beneficiary’s income in the year of non-compliance.
• Deletion of subsection (9A), which sets out the tax treatment of funds held in a Home Ownership Savings Plan when its registration is withdrawn.

These amendments will reduce the net take home amounts from pension withdrawals and may also discourage early pension withdrawals.

Additionally, the deletions related to the Home Ownership Savings Plan represent a clean-up, as the associated tax incentives are no longer applicable.

Fringe benefit and qualifying interest rates of tax

Fringe benefit tax and withholding tax on qualifying interest

The Act has introduced an amendment of the Third Schedule to the ITA, which clarifies that the rate of tax on fringe benefit provided by an employer in a particular year of income shall be taxed at the resident corporate rate of tax. Additionally, withholding tax on qualifying interest shall be deemed as final tax and will not be subject to further taxation under the individual tax bands.

Contact us

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
Senior Associate

Ruth Mayenga
Associate

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