By Patrick Wekesa
Kenya's payroll statutory framework has undergone more changes in the past three years than in the previous decade. Three separate statutory changes — the SHIF transition, the Affordable Housing Levy reinstatement, and NSSF Year 4 rates — required payroll system updates at different points between October 2024 and February 2026. Employers and payroll services providers in Kenya that did not update their systems at each change date are running payrolls with incorrect deductions, creating cumulative underpayment liability that KRA will assess at audit. This guide covers each change, what it means for your payroll compliance position, and what employers need to check right now.
NSSF Year 4 Rates: Effective February 2026
The NSSF Act 2013 established a phased increase in contributions over six years. Year 4 rates came into effect in February 2026, increasing the Tier II ceiling. Employers running payroll on Year 3 or earlier rates since February 2026 have been under-remitting. The correct rates as of July 2026 are:
- Tier I: 6% employee contribution on KES 0–9,000 pensionable pay = maximum KES 540 employee, KES 540 employer.
- Tier II: 6% employee contribution on KES 9,001–108,000 pensionable pay = maximum KES 5,940 employee, KES 5,940 employer.
- Maximum combined NSSF per employee per month: KES 12,960 (KES 6,480 employee + KES 6,480 employer).
Employers who were applying Year 3 ceiling rates must back-calculate the shortfall from February 2026 onwards and remit the difference, plus any statutory interest. A payroll audit will identify the exact under-remittance per employee. Two Max Group applied Year 4 rates on all client payrolls from the February 2026 effective date — no client was exposed to back-payment liability.
SHIF: What the October 2024 Transition Required
The Social Health Insurance Act 2023 replaced NHIF with the Social Health Insurance Fund (SHIF) from October 2024. The transition required every employer to:
- Stop deducting NHIF contributions from employees' October 2024 salary.
- Begin deducting SHIF at 2.75% of gross salary from October 2024 salary.
- Update NSSF/NHIF portal registrations to SHIF/SHA registrations.
- Apply the new SHIF tax relief from December 2024: 15% of the SHIF contribution, capped at KES 5,000/month reduction in PAYE payable.
Employers who continued deducting NHIF rates after October 2024 were under-deducting SHIF (since NHIF flat rates were lower than 2.75% of salary for many employees). This created an employee deduction shortfall that must be corrected in consultation with the SHA. Employers who applied the SHIF rate correctly but failed to apply the tax deductibility from December 2024 have been over-collecting PAYE from employees — meaning employees are owed a refund via adjusted PAYE in the current period. Both scenarios require a structured payroll correction.
Affordable Housing Levy: Reinstatement, Deductibility & Current Position
The Affordable Housing Levy (AHL) was introduced under the Finance Act 2023, immediately challenged in court, and reinstated by the Court of Appeal in March 2024. All employers were required to begin deducting and remitting AHL from 19 March 2024. The employer's obligations are:
- Deduct 1.5% of gross salary from the employee each month.
- Match with a 1.5% employer contribution.
- Remit both by the statutory deadline.
- Apply AHL employee contribution tax deductibility from 27 December 2024: the employee AHL payment reduces PAYE payable (15% of AHL contributed, with the standard PAYE relief calculation).
Employers who did not deduct AHL from March 2024, or who deducted it without applying the tax deductibility from December 2024, have compliance gaps. The former creates a back-payment and penalty exposure; the latter creates over-withheld PAYE. Both require correction through adjusted payroll runs and, where relevant, amended P10 returns on KRA iTax.
The Finance Act 2025 Amendments Employers Must Know
The Finance Act 2025 (effective July 2025) included the following changes directly relevant to payroll processing services in Kenya:
- Digital Asset Tax: Income from digital assets is now subject to PAYE where paid by an employer. Directors' fees paid in token form or other digital assets are taxable employment income.
- Low Interest Benefit Rate: The prescribed interest rate for calculating fringe benefit on low-interest loans to employees was adjusted. Employers providing loans at below-market rates must recompute the benefit and include it in taxable income.
- Per Diem Thresholds: The tax-exempt per diem threshold for domestic travel was adjusted. Allowances above the threshold are now taxable employment income and subject to PAYE. Employers paying fixed monthly travel allowances must review whether they fall within the exempt limit.
- Insurance Relief: The deductibility ceiling on education insurance premiums paid by employers on behalf of employees was updated. Payroll systems must apply the correct relief cap.
Each of these requires a specific system update that a specialist Kenya payroll services provider should apply automatically at the effective date. Companies managing payroll in-house must track the Kenya Gazette for each Finance Act change and update their calculations manually — a process that creates significant scope for error.
How to Audit Your Current Payroll Compliance Position
Given the volume of changes since 2023, every employer in Kenya should confirm the following before the next payroll run:
- NSSF: Are you applying Year 4 rates (February 2026) — maximum KES 6,480 per employee per side?
- SHIF: Are you deducting 2.75% of gross salary (not the old NHIF flat rate) and remitting to SHA?
- SHIF relief: Are you applying the 15% SHIF contribution tax relief to PAYE from December 2024?
- AHL: Are you deducting 1.5% from the employee and matching with 1.5% employer contribution?
- AHL relief: Are you applying the AHL contribution tax deductibility from December 2024?
- Per diem: Have you reviewed travel allowances against the 2025 Finance Act thresholds?
- Records: Do you have five years of P10 returns, NSSF schedules, and SHIF receipts archived and accessible?
If any answer is uncertain, a structured payroll audit will produce a definitive compliance position report and an action plan to correct any gaps before KRA identifies them. For companies considering outsourcing to remove this compliance burden permanently, see our guide on payroll outsourcing in Kenya and our overview of how payroll processing works in Kenya in 2026. Our HR compliance audit service covers the Employment Act obligations alongside the payroll statutory requirements for a complete compliance review.
