Two employees on the same KES 120,000 salary can take home net pay differing by nearly KES 3,500 a month, and neither payslip is fraudulent. One payroll applies the tax bands to gross pay. The other applies them to gross less NSSF, SHIF and the Housing Levy — which is what the law has required since 27 December 2024. Only the second is right.
This guide sets out how to calculate PAYE in Kenya in 2026: the order deductions must be taken in, the bands and reliefs that apply this year, the rates for NSSF, SHIF and the Affordable Housing Levy, a worked example on a real salary, and the arithmetic error that quietly costs Kenyan SMEs hundreds of thousands of shillings a year.
Key takeaways
- PAYE is charged on gross pay after NSSF, SHIF and the employee's Housing Levy come off — not on gross itself.
- The PAYE bands and the KES 2,400 monthly personal relief did not change in 2026, but the NSSF ceiling did, which changes every taxable-pay figure on your payroll.
- NSSF, SHIF and the Housing Levy are each calculated on gross pay independently of one another — never stacked.
- Getting the order wrong over-taxes staff by roughly 30% of whatever you failed to subtract, and the liability sits with the employer.
What changed in PAYE calculation in Kenya — and what did not
The rule governing today's payroll arrived with the Tax Laws (Amendment) Act, 2024. According to KRA's public notice on that Act, from 27 December 2024 five items became allowable deductions in arriving at taxable employment income: the Affordable Housing Levy, SHIF contributions, registered pension or provident fund contributions capped at KES 30,000 a month, post-retirement medical fund contributions capped at KES 15,000 a month, and mortgage interest of up to KES 30,000 a month on residential borrowing.
The same notice discontinued the affordable housing relief and the post-retirement medical fund relief. That distinction is the heart of the matter: a relief comes off tax you have already computed, while a deduction comes off pay before you compute tax at all. Housing and SHIF moved from the first category to the second, and a payroll still treating them as reliefs produces the wrong number.
What did not change is the rate card. CRS noted in its July 2026 summary of the Finance Act, 2026 that the Act leaves the bands, rates and personal relief alone, so employers need not update their tax tables. Proposals to widen the lowest band to KES 30,000 were dropped from the Finance Bill, 2026 on fiscal grounds, as activpayroll reported in May 2026.
The correct order of deductions when you calculate PAYE
Run the sequence in this order and the arithmetic looks after itself.
- Start with gross monthly pay — basic salary plus regular cash allowances.
- Calculate NSSF, SHIF and the employee's Housing Levy, each on that gross figure.
- Subtract all three, plus any pension, post-retirement medical or mortgage interest deductions the employee qualifies for within KRA's caps. The result is taxable pay.
- Apply the tax bands to taxable pay.
- Subtract personal relief of KES 2,400 from the tax. What remains is PAYE.
Two mistakes hide in step two. The first is calculating one statutory deduction on what is left after another — SHIF on gross less NSSF, say. Each of the three is charged on gross, independently. The second is applying caps to the wrong thing: NSSF caps the earnings it is charged on, while SHIF and the Housing Levy have no ceiling at all.
PAYE tax bands in Kenya for 2026
PwC's Kenya tax summary sets out the bands introduced by the Finance Act, 2023 and still in force; IEA Kenya confirms the two upper rates. Monthly:
| Monthly taxable pay (KES) | Rate |
|---|---|
| First 24,000 | 10% |
| Next 8,333 | 25% |
| Next 467,667 (up to 500,000) | 30% |
| Next 300,000 (500,001 to 800,000) | 32.5% |
| Above 800,000 | 35% |
Resident personal relief is KES 2,400 a month, and it comes off the computed tax rather than off pay.
How to calculate NSSF, SHIF and the Housing Levy on gross pay
NSSF. Phase 4 of the NSSF Act, 2013 took effect in February 2026. KPMG Kenya and Vialto Partners both put the lower earnings limit at KES 9,000 and the upper limit at KES 108,000, with 6% charged on each tier and matched by the employer — KES 540 on Tier I and KES 5,940 on Tier II. The maximum monthly deduction is therefore KES 6,480 from the employee and KES 6,480 from the employer. Below the upper limit it is 6% of pensionable pay.
SHIF. Salaried employees contribute 2.75% of gross salary, with a floor of KES 300 a month and no upper limit, on both EY's and Vialto's reading of the Social Health Insurance regulations. That floor corresponds to gross pay of about KES 10,900, so anyone below that still has KES 300 deducted. The missing ceiling bites at the other end: an employee on KES 500,000 contributes KES 13,750 a month, uncapped.
Affordable Housing Levy. KRA's notice on collection of the levy sets it at 1.5% of the employee's gross monthly salary, matched by 1.5% from the employer, on a base of basic salary plus regular cash allowances. Only the employee's half is deductible for PAYE; the employer's half is a cost of employment, not something you take off the payslip.
A worked example: PAYE on a KES 120,000 monthly salary
Take an employee on KES 120,000 gross, with no pension beyond NSSF and no mortgage.
Statutory deductions, each on gross: NSSF caps at KES 6,480 because gross exceeds the KES 108,000 upper limit; SHIF is 2.75% of 120,000, or KES 3,300; the Housing Levy is 1.5%, or KES 1,800. Together, KES 11,580.
Taxable pay is KES 108,420. Applying the bands: 10% of the first 24,000 is 2,400; 25% of the next 8,333 is 2,083.25; 30% of the remaining 76,087 is 22,826.10. Tax before relief is KES 27,309.35, and after personal relief of KES 2,400, PAYE is KES 24,909.35.
Net pay is KES 120,000 less PAYE of 24,909.35 and statutory deductions of 11,580 — roughly KES 83,510 before loans, union dues or voluntary items.
The mistake most Kenyan businesses make, and what it costs
The common error is applying the bands straight to gross pay. On the same KES 120,000 salary that gives PAYE of KES 28,383.35 — KES 3,474 a month more than the employee owes, because KES 11,580 of deductions were skipped and all of it sat in the 30% band. Over a year that is KES 41,688 from one employee, and across a team of ten at that level, more than KES 400,000 of staff money routed to KRA that should have stayed in pockets.
A second error has spread since February 2026: payrolls still deducting NSSF at the old Phase 3 ceiling of KES 4,320 rather than KES 6,480. That under-remits the fund by KES 2,160 per employee per month, and NSSF's employer guidance sets the penalty at 5% of contributions due for each month or part-month outstanding. It also overstates taxable pay by that same KES 2,160, adding about KES 648 to the employee's monthly PAYE.
Neither error is the employee's to fix. Under-deduction leaves the employer owing the difference plus penalties; over-deduction means refund claims, amended returns and staff who no longer trust their payslips.
Remittance deadlines employers must meet
PAYE, NSSF and SHIF are all due by the 9th day of the month following the payroll month. NSSF's employer obligations set a 5% penalty for each month or part-month paid late, and EY puts the SHIF penalty for unpaid contributions at 2%. The Housing Levy runs on a different clock: KRA gives the due date as the 9th working day after month-end, with a 3% penalty for every month it stays unpaid. Where a due date lands on a weekend or public holiday, pay early rather than assume an extension.
Frequently asked questions
Is SHIF deducted before or after PAYE in Kenya?
Before. SHIF is calculated on gross pay and subtracted from it, and the bands apply to what remains. KRA's notice on the Tax Laws (Amendment) Act, 2024 made SHIF an allowable deduction from 27 December 2024, replacing the older treatment where health contributions did not reduce taxable pay.
Do employers pay SHIF as well, like NSSF and the Housing Levy?
No. SHIF is deducted from the employee only, unlike NSSF and the Housing Levy, where the employer pays a matching 6% and 1.5%. The employer's duty on SHIF is to deduct accurately and remit on time — with a system like Force HRM the 2.75% and the KES 300 floor apply themselves each month.
Did the PAYE bands change in 2026?
No. The Finance Act, 2026 left the bands, rates and personal relief untouched, so the tables you used in 2025 still apply. Proposals to widen the lowest band and cut the rate on mid-range incomes were dropped before the Bill passed, and no replacement has been gazetted.
Getting the order right every month
None of this is difficult arithmetic. It goes wrong because it repeats across every employee every month, usually on a spreadsheet built before the December 2024 amendment and quietly kept running. The fix is to compute statutory deductions on gross, subtract them before touching the bands, and check that your NSSF ceiling reads KES 6,480.
Force HRM is a mobile-first payroll and HR platform built for Kenyan SMEs, applying PAYE, SHIF, NSSF and the Housing Levy in the statutory order and updating them when the rules move — and because it speaks MCP, you can run payroll or check a deduction by asking an AI assistant in plain language. See how automated PAYE and statutory deductions work for your team.
