The Finance Bill, 2025 introduces notable proposals impacting payroll management, employee benefits, and employment-related income tax provisions. The proposals are currently under review through public participation and parliamentary debate and are expected to take effect on 01 July 2025, unless stated otherwise.

This focused tax alert highlights the key proposals affecting employee income tax, per diem allowances, pension benefits, and other payroll components to help your compliance and HR teams plan ahead.

Key Payroll & Employee Income Tax Proposals

Increased Tax-Free Per Diem Limit

The Bill proposes to increase the tax-free daily per diem allowance from KShs 2,000 to KShs 10,000 for employees on official duties outside their usual place of work.

Implication:

• Only per diem amounts up to KShs 10,000 per day will be exempt from income tax.
• Amounts exceeding this threshold will be treated as taxable employment income.

Proposed Effective Date: 01 July 2025

Clarification and Clean-up on Tax Exemption for Pension Benefits

The Bill proposes to:

• Split the tax exemption on gratuity and other allowances paid under public pension schemes to avoid ambiguity.
• Remove outdated provisions relating to taxation of pension withdrawals upon retirement, previously invalidated by the Tax Laws (Amendment) Act, 2024.

Implication:

• Better clarity on the tax treatment of gratuity vs other retirement benefits for public sector employees.
• Aligns pension income taxation with recent legislative reforms.

Proposed Effective Date: 01 July 2025

Harmonized Definition of Related Persons (Indirect Payroll Implication)

Although not directly a payroll provision, the Bill introduces a harmonized definition of “related person” under the Income Tax Act. This covers individuals connected through:

• Marriage
• Consanguinity (blood relation)
• Affinity (relation by marriage) 

Implication for Payroll/Employment:

• Affects situations involving non-cash benefits, employment of relatives, and related-party employment arrangements for tax compliance and reporting purposes.

Proposed Effective Date: 01 July 2025

Conclusion

These proposals reflect the government’s intent to:

• Ease the tax burden on employee allowances amidst rising living costs.
• Streamline pension benefit taxation in line with current legislation.
• Provide clearer definitions for tax compliance on employment income and benefits related to family or related-party transactions.

How ElevateHR Africa Supports Your Team

At ElevateHR Africa, we empower businesses to stay ahead of evolving payroll tax compliance obligations. Through our dedicated advisory sessions and tailored HR software solutions, we help you:

✔️ Navigate tax changes and payroll updates
✔️ Interpret employment-related tax obligations
✔️ Understand cash and non-cash benefit treatments and statutory deductions
✔️ Prepare for operational adjustments ahead of key legislation dates