Finance Bill 2025: Govt Directs Employers to Apply All Tax Reliefs in PAYE Deductions
President William Ruto’s Cabinet has approved the Finance Bill 2025, introducing notable changes that will significantly affect how employers compute Pay As You Earn (PAYE) taxes. These reforms are designed to enhance fairness, simplify tax compliance, and seal revenue loopholes that have previously been exploited.
At the heart of the new legislation is a directive that compels employers to apply all applicable tax reliefs and exemptions automatically when calculating PAYE for their employees. This marks a major shift from the current system, where many workers are forced to seek refunds from the Kenya Revenue Authority (KRA) because their employers often overlook these deductions.
In a statement released on Tuesday, April 29, State House emphasized the motivation behind the move. “Employers must immediately apply all applicable tax reliefs and exemptions while computing Pay As You Earn (PAYE) taxes for employees,” the Cabinet dispatch explained. “Employees are currently forced to request refunds from the Kenya Revenue Authority because many employers fail to provide these reliefs.”
According to the Cabinet, this change is expected to benefit workers by ensuring they access their full tax entitlements directly through payroll, instead of navigating the tedious refund process. The aim is to simplify the system and reduce the administrative burden for both taxpayers and the KRA.
The reform is part of a broader strategy under the Bottom-Up Economic Transformation Agenda (BETA), which aims to build a more inclusive and resilient economy. By adjusting tax regulations, the government seeks to ease the financial strain on workers and small business owners while tightening oversight on tax compliance.
Significantly, the Cabinet also highlighted that these updates will help reduce the need for frequent tax increases. The goal is to enhance tax efficiency rather than raise additional revenue through higher rates. By closing loopholes and ensuring accurate tax relief application, the government hopes to generate more predictable and transparent revenue flows.
One of the key drivers behind the change was a concerning trend involving fraudulent refund claims. The Cabinet pointed to a pattern where some taxpayers inflated refund requests in order to siphon public funds. “The bill’s main goals are to improve efficiency and close loopholes, notably those on tax expenditures that have historically been used to embezzle money from public coffers by filing false tax refund claims,” the statement noted.
This crackdown on fraudulent practices is coupled with incentives aimed at supporting small businesses. For instance, entrepreneurs running micro and small enterprises will now be allowed to deduct the full cost of common tools and equipment in the year of purchase. This change is expected to encourage investment in productivity-enhancing assets by reducing the tax burden upfront.
To reinforce these reforms, the Finance Bill 2025 includes proposed amendments to multiple tax statutes. These include the Income Tax Act, the VAT Act, the Excise Duty Act, and the Tax Procedures Act. The proposed changes are intended to streamline refund processes, improve legal clarity, and reduce tax-related disputes that often delay revenue collection.
Moreover, the bill proposes simplifying tax refund procedures. In the past, many Kenyans endured long queues at KRA offices to follow up on pending claims. With the new approach, the refund process should become faster and more transparent, thereby restoring public confidence in the tax system.
In a related development, the Cabinet has also agreed to revise the proposed 2025/2026 national budget in order to reduce the fiscal deficit. This means the initially proposed budget of KSh 4.3 trillion will be scaled down.
The decision aligns with the government’s plan to reduce the budget deficit to 4.5% of Gross Domestic Product (GDP) in the 2025/2026 fiscal year. This is a continued improvement from the 5.1% target in 2024/2025 and 5.3% in 2023/2024.
These fiscal adjustments signal a shift towards a more sustainable public finance framework. By managing debt levels and reducing unnecessary government expenditure, the administration seeks to balance economic growth with fiscal responsibility.
In summary, the Finance Bill 2025 is a major step toward tax fairness and economic reform. By requiring employers to apply tax reliefs automatically, simplifying refund processes, and supporting small businesses, the government is pushing for a tax system that is both efficient and equitable. Additionally, by narrowing the fiscal deficit and streamlining tax laws, the Cabinet is working to ensure long-term economic stability and accountability.
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Finance Bill 2025: Govt Directs Employers to Apply All Tax Reliefs in PAYE Deductions
