Fresh Payroll Rules: KRA Issues Guidance on Employee Tax Reliefs and Exemptions
KRA has issued new guidelines to employers on how to apply income tax deductions, reliefs and exemptions when paying employees.
In a public notice released on Thursday, October 2, KRA confirmed that the Finance Act, 2025 has amended the Income Tax Act, Cap 470. Employers are now required to include all the deductions and exemptions in the payroll.
According to KRA, resident employees must get personal relief while insurance relief, mortgage interest deductions and contributions to registered pension schemes and post-retirement medical funds will also apply. However, these benefits are subject to statutory limits and must be backed by employee’s documentation.
Employers are also required to deduct statutory contributions like Affordable Housing Levy and Social Health Insurance Fund as per the law. Employees with valid tax exemption certificates will continue to enjoy exemptions provided they fall within the prescribed thresholds.
KRA emphasized that accuracy and timeliness is key in filing Pay As You Earn (PAYE) returns. Employees are advised to submit documentation to support claims for reliefs and deductions as soon as possible to enable smooth payroll processing.
The new directive comes after the Tax Laws Amendment Act was signed into law in December 2024. Among the changes are new deductible contributions including Housing Levy, Social Health Insurance Fund and post-retirement medical funds with a combined monthly cap of KSh15,000.
Employees can also claim deductions on mortgage interest of up to KSh360,000 per annum for residential homes financed through recognized institutions. Contributions to pension or provident funds remain deductible up to the same limit.
Notably, the law has scrapped reliefs on Housing Levy and post-retirement medical contributions. However, some employer provided benefits are tax exempt. These include annual benefits of less than KSh60,000 and meals provided by employers capped at KSh5,000 per month.
KRA’s new guidance comes as employers prepare to make payroll adjustments to comply with the new tax law and ease employee concerns on salary deductions.
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Fresh Payroll Rules: KRA Issues Guidance on Employee Tax Reliefs and Exemptions