Reducing tax burden on formal workers won't hurt State revenues
Opinion
By
Grace Omondi
| Jun 11, 2026
The the national budget statement will be read. The numbers will dominate the headlines, but their true significance lies in what they mean for ordinary Kenyans, businesses, and savers.
Approximately 3.5 million Kenyans are employed in the formal sector, just 16.2 per cent of the total workforce, while the remaining 83.8 per cent toil in the informal economy, largely outside the tax net. Yet formal sector workers shoulder the heaviest burden of tax collection apparatus, contributing the lion's share of the Sh2.2 trillion that the Kenya Revenue Authority targets annually.
This quiet crisis embedded in the Finance Bill, threatens to undermine the very economy that we seek to stimulate. Buried in the current tax code, and unchanged in the Finance Bill 2026, is a PAYE structure that taxes top-earners at 35 per cent. On the surface, this seems reasonable. But look closer, and a structural anomaly emerges.
Our country’s corporate income tax rate is 30 per cent. The National Tax Policy states that personal income tax should not exceed the corporate rate. Yet the top PAYE bracket sits at 35 per cent, five percentage points higher.
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The Kenya Bankers Association commissioned an economic impact study that modelled the effects of a 5 per cent reduction in PAYE rates across all income bands. Such a reduction would inject approximately Sh28 billion annually back into the pockets of formal sector workers. That money would circulate through the economy with a multiplier effect, generating an additional Sh42 billion in GDP output and unlocking up to Sh140 billion in formal lending capacity.
The Treasury has expressed scepticism. The estimated revenue foregone, Sh35 billion in the first year, is deemed too risky in an environment of fiscal constraint. Yet the KBA study counters that the foregone revenue would be substantially offset by increased VAT and excise collections as disposable income converts to consumption. Within one financial year, Sh27–31 billion in additional tax revenue would flow back to the exchequer through indirect channels.
Another dimension is tax compliance. An estimated 1.7 million individuals file personal income tax returns out of a working-age population exceeding 30 million. The reasons range from informality to evasion to simple lack of trust in the system.
A less discussed but equally consequential dimension is tax impact on productivity. We face skills mismatch in critical sectors such as healthcare, engineering and technology, yet high-earning professionals in these fields face the steepest tax rates. Granted, the country faces genuine constraints, but the pressure in the formal sector is becoming increasingly unsustainable. To grow the tax base, the government should make formal participation more attractive.
First, cut the tax burden on formal workers. The layering of PAYE with the Affordable Housing Levy, Social Health Insurance Fund contributions, and NSSF increases has eroded wages. When households have more disposable income, they spend more within the local economy. Consequentially, spending ripples through MSMEs, lifting VAT collection, improving loan repayment rates, and ultimately returning a portion of the revenue to the exchequer.
Second, broaden the tax base. Our informal sector represents a vast pool of potential taxpayers who remain outside the formal economy, often because they lack the incentives needed to comply. Bringing these businesses into the formal sector would expand government revenue, and enable them to grow, access credit, and build sustainable enterprises.
Also, enable cooperative and association-based filing, where small players such boda boda saccos file consolidated returns, creating peer accountability without reaching out to individual operators.
Ms Omondi is a communication specialist at a financial institution