Taxes on salaries, wages, and allowances paid to workers grew at a single-digit rate in the just concluded financial year, underlining a toughening labour market where decent formal jobs are shrinking amid a freeze on pay raise in most sectors.
The Kenya Revenue Authority (KRA) netted Sh543.19 billion in payroll taxes for the year ended June 2024, a 9.76 percent growth over Sh494.90 billion in the year before.
The growth in pay-as-you-earn (PAYE) receipts remained in the single-digit territory for the second year running even after the Ruto administration raised tax rates for the high-salary earners in the review fiscal year.
The taxman enforced a 32.5 percent tax on workers earning more than Sh500,000, while the rate for those on more than Sh800,000 monthly pay rose to 35 percent. The maximum PAYE rate was previously 30 percent.
Tax experts had expected the new PAYE tax bands to have a negligible impact on overall growth given that more than 90 percent of workers in formal sector earn a monthly salary of less than Sh100,000.
KRA Commissioner-General Humphrey Wattanga said remittances from private firms grew 13.4 percent year-on-year, while remittances by public organisations rose at a slower pace of 3.7 percent. The taxman does not usually make public the actual PAYE collections from the two sectors.
The Treasury had earlier in the fiscal year cited “delayed disbursements to various Government entities which affected the [payroll] remittances from the public sector” as a damper to growth in payroll taxes.
The growth in payroll taxes from the government and its agencies has further been hampered by a long-standing moratorium on new employment in civil service which restricted hiring in essential sectors such as security, education, and health since December 2013 to rein in the public wage bill.
The situation will be exacerbated by the suspension of new hiring in the public sector this fiscal year, save for the essential sectors.
The Treasury says this will pave the way for planned “audit and cleanse all public payrolls, pension and transfers to the vulnerable”, with a view to eliminate ghost workers as well as enforce payment of salary scales as approved or recommended by the SRC [Salaries and Remuneration Commission”.
Private businesses had, on the other hand, complained of complained of increasing cost of operation, with a “multitude” of taxes and levies pushing smaller firms into the informal, or jua kali, sector.
“Many businesses especially the MSMEs [micro-, small- and medium-sized enterprises] cannot afford the costs associated with operating in the formal employment sector,” FKE executive director Jacqueline Mugo said in an earlier interview. “This has led to the growth in the number of unemployed Kenyans as many employers try to manage their costs.”
Businesses had during the review year complained of persistently rising cost pressures on the back of elevated prices of materials and energy after lawmakers voted to double the fuel levy on petrol and diesel to 16 percent.
Companies generally reported a “marked drop” in demand for goods and services which they have linked to elevated inflationary pressure and cash flow challenges.
The inflationary pressures eroded consumers’ purchasing power, reduced demand for goods and services, and constrained new investments.
