Treasury Cabinet Secretary John Mbadi has announced several changes to income tax in the 2025/2026 Budget, aiming to increase government revenue while also easing the tax burden on Kenyan workers and businesses.
During his presentation of the budget estimates to the National Assembly, CS Mbadi introduced the Finance Bill 2025, which includes significant reforms.
These reforms are meant to remove confusion in existing tax laws, create fairness in how taxes are charged, and support economic growth across different sectors.
Gratuity Payments Now Fully Tax-Exempt
One of the most notable announcements is that all gratuity payments—whether from government jobs or private employers—will now be completely exempt from taxation.
This builds on the Tax Laws (Amendment) Act of 2024, which had already removed taxes from pensions and some gratuities. However, the earlier law had created confusion about whether private pension schemes were included in the exemption.
Now, with the new proposal, there is no more uncertainty: retirees from both the public and private sectors will receive their full terminal benefits without any tax deductions. This change is expected to bring financial relief to thousands of Kenyans who are retiring and depending on these lump-sum payments to secure their future.
“To eliminate any confusion, we are now proposing an amendment to clarify that all gratuity payments are exempt from tax,” said CS Mbadi.
Advance Pricing Agreements for Multinationals
Another key reform involves taxation of multinational companies. The Finance Bill 2025 will give the Kenya Revenue Authority (KRA) the power to enter into Advance Pricing Agreements (APAs) with global companies doing business in Kenya.
These agreements are designed to handle and prevent tax disputes involving transfer pricing, which often arises when multinational firms move profits across borders to reduce their tax bills.
By allowing APAs, the government hopes to reduce legal battles between companies and the KRA, and to create a more predictable and transparent tax system for global investors.
Relief for Local Businesses on Capital Expenditure
For Kenyan businesses, especially small and medium-sized enterprises (SMEs), the Treasury has proposed a more favorable tax deduction method for industrial and operational tools such as linen, machinery, and equipment.
Currently, businesses must spread the cost of such purchases over a three-year period for tax deduction purposes. Under the new plan, businesses will be able to deduct the entire cost of qualifying items in the same year they buy them.
This will significantly reduce the tax burden in the year of investment and is expected to encourage more local businesses to invest in equipment and expand their operations.
Expanded Tax Relief for Mortgage and Home Construction Loans
The 2025 Finance Bill also includes a proposal to extend mortgage interest relief to Kenyans who take out loans to build their own homes.
At the moment, this relief is only given to individuals who use loans to buy or renovate existing homes. If Parliament approves the proposed change, individuals who build their own residential houses will also enjoy tax relief on the interest paid on construction loans.
This measure is intended to make it easier and more affordable for Kenyans to become homeowners, especially at a time when housing is becoming increasingly expensive in urban areas. It also supports government efforts to promote inclusive and affordable housing.
Broader Goals of the 2025/2026 Budget Reforms
CS Mbadi emphasized that all the proposed changes are part of a bigger strategy to ensure that Kenya’s tax system is clear, fair, and supportive of economic development.
“These measures are designed to stimulate economic activity, promote fairness in tax treatment, and provide clarity in implementation,” he stated.
The new income tax proposals will only take effect if Parliament passes the Finance Bill 2025. However, the outlined reforms mark a major shift in Kenya’s approach to income tax policy—balancing the need for higher revenue collection with the need to support workers, retirees, and businesses.
If implemented, these changes are expected to boost investor confidence, improve taxpayer compliance, and provide direct benefits to both working Kenyans and entrepreneurs.
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