Meta Description: Understand the statutory tax on director fees Kenya requires for resident and non-resident board members. Learn the differences between PAYE and withholding tax (WHT) to remain fully compliant in 2026.
When structured incorrectly, the tax on director fees Kenya requires can lead to severe audit penalties from the Kenya Revenue Authority. The direct answer to how these payments are taxed depends entirely on whether the director is classified as executive or non-executive. Executive directors pay Pay As You Earn (PAYE) on their fees at graduated rates of up to 35%, while non-executive directors are subject to withholding tax (WHT) at 5% for residents and 20% for non-residents. Many foreign entities, multinational corporations, and non-governmental organisations operating in Kenya struggle to manage this distinction, which frequently triggers payroll audits.
Misclassifying these payments can result in back-taxes, steep interest, and non-compliance penalties during a KRA audit. To help your organisation maintain perfect compliance in 2026, this guide examines the statutory definitions, the exact tax rates, and the practical administrative steps required to process director payments in Kenya.
The Legal Distinction: Executive vs Non-Executive Directors
The tax treatment of director remuneration is determined by the nature of the director's relationship with the company. The Income Tax Act Cap 470 and the Employment Act Cap 226 establish two distinct pathways for taxing corporate leaders.
Executive Directors
An executive director is an employee of the company. They hold a contract of service, manage daily operations, work regular office hours, and receive a monthly salary alongside other staff benefits. Because of this employer-employee relationship, all emoluments paid to an executive director are subject to PAYE. This includes their base salary, monthly allowances, performance bonuses, and any director fees they receive for attending board meetings.
Non-Executive Directors
A non-executive director does not participate in the daily management of the business. They hold a contract for service rather than a contract of service. Their role is advisory and supervisory, primarily exercised during periodic board and committee meetings. Because they are not employees, their remuneration is not processed through the regular payroll. Instead, the payments they receive for their board services are classified as professional fees and are subject to Withholding Tax rather than PAYE.
Statutory Rates and Rules for Tax on Director Fees Kenya
For non-executive directors, the tax on director fees Kenya applies is processed through the withholding tax regime. The specific tax rate and finality of the tax depend entirely on the residency status of the director.
Resident Non-Executive Directors
When a company pays a director fee to a resident non-executive director, it must withhold tax at a rate of 5%. This 5% deduction is not a final tax. It serves as an advance tax. The company must deduct this amount at the point of payment and remit it to the Kenya Revenue Authority on the iTax portal.
At the end of the year, the resident director is required to declare their total income, including these director fees, in their annual individual tax return. The fees are taxed at the standard graduated individual tax bands, which scale up to 35% for high earners. The director will then claim the 5% tax already withheld as a tax credit to offset their final annual tax liability.
Non-Resident Non-Executive Directors
For non-resident board members, the rules change. The withholding tax rate on director fees paid to a non-resident director is 20%. Unlike the resident rate, this 20% withholding tax is a final tax. The non-resident director has no obligation to file an annual tax return in Kenya for this income, and the Kenyan company has no further tax obligations once the 20% has been deducted and remitted.
If your business needs assistance in structuring these agreements correctly to avoid classification disputes, our team provides expert guidance through our tax consultancy services in Kenya.
How Director Fees Differ from PAYE on a Salary
Understanding the operational differences between standard payroll taxes and withholding taxes on director fees is vital for your finance and HR departments. The table below outlines the core differences in 2026:
| Tax Feature | Executive Director (PAYE) | Non-Executive Director (WHT) |
|---|---|---|
| Tax Mechanism | Pay As You Earn (PAYE) | Withholding Tax (WHT) |
| Resident Tax Rates | Graduated bands (10% to 35%) | 5% (Advance tax) |
| Non-Resident Tax Rates | Graduated bands (10% to 35%) | 20% (Final tax) |
| Social Health Authority (SHIF) | 2.75% of gross salary | Exempt (No employment relationship) |
| Affordable Housing Levy (AHL) | 1.5% (Employer) + 1.5% (Employee) | Exempt |
| NSSF Pension Contributions | Statutory Tier I and Tier II deductions | Exempt |
| Filing Platform | iTax PAYE Return | iTax WHT Return |
As shown in the table, executive salaries carry a higher administrative and financial burden due to statutory levies. Non-executive director fees are exempt from the 2.75% Social Health Insurance Fund contribution and the 1.5% Affordable Housing Levy because these levies are strictly tied to employment contracts. Working with a specialist provider of payroll processing services in Kenya ensures that these statutory deductions are applied only to the correct categories of staff.
Value Added Tax (VAT) on Director Fees
A common point of confusion during tax audits is whether non-executive director fees attract Value Added Tax. Under Kenyan tax law, a resident non-executive director is considered to be supplying a service to the company. If the director's total taxable supplies, including director fees and any other commercial consulting income, exceed 5 million Kenyan Shillings within a 12-month period, they must register for VAT.
Once registered, the director must charge VAT at the standard rate of 16% on their director fees. The paying company will pay this VAT to the director, who must then remit it to the KRA. The company can typically claim this as input VAT, provided they hold a proper electronic tax invoice generated through the KRA eTIMS platform. If the director is not registered for VAT, no VAT should be charged or paid on the fees.
Step-by-Step Remittance and Compliance Calendar
Compliance in Kenya is strictly bound to monthly deadlines. Failing to remit taxes on time results in immediate automated penalties on the iTax system.
Step 1: Deduction at Source
When the board approves and pays the director fees, the finance team must immediately calculate and deduct either the 5% resident WHT or the 20% non-resident WHT.
Step 2: Generating the Payment Slip on iTax
The accountant must log into the company's KRA iTax portal, navigate to the Withholding Tax payment section, enter the director's KRA PIN for residents or register details for non-residents, and generate a payment slip. This system generates a unique payment registration number.
Step 3: Remittance before the Deadline
The tax withheld must be paid to the KRA on or before the 9th day of the month following the month in which the payment was made. For example, if director fees are paid on any day in August 2026, the withholding tax must be remitted by the 9th of September 2026. This is the same strict 9th-of-the-month deadline that applies to PAYE, SHIF, and Affordable Housing Levy submissions.
Step 4: Issuing the WHT Certificate
Once payment is processed, the iTax system generates a Withholding Tax certificate. The company must download this certificate and send it to the resident director. The director will need this document as proof of tax paid when filing their annual tax returns before the 30th of June deadline the following year.
How International Organisations Can Manage Local Board Compliance
Foreign companies and NGOs establishing offices in Kenya often appoint a mix of local and international directors to meet regulatory requirements. Managing the payroll, tax, and local labour compliance for these individuals can be operationally complex from abroad.
To mitigate these risks, many global organisations utilize an employer of record in Kenya. An EOR handles the local payroll, processes the statutory deductions for executive directors, and manages the withholding tax compliance for local advisors, ensuring that the parent company remains fully compliant without needing a large, local in-house finance team.
Common Audit Risks and How to Avoid Them
The Kenya Revenue Authority actively scrutinises director transactions during corporate tax audits. To protect your organisation, keep these common risk areas in mind:
- Recharacterisation of Fees: The KRA may attempt to recharacterise non-executive director fees as salary if they find that the director is performing daily executive tasks. Ensure that board minutes, consultancy agreements, and corporate resolutions clearly define the non-executive advisory nature of the role.
- Missing eTIMS Invoices: If a director is registered for VAT, the company must not pay the VAT portion of the fee without receiving a valid eTIMS invoice. Paying VAT without proper electronic documentation will lead to the deduction being disallowed during an audit.
- Late Remittances: The 9th of the month deadline is strict. Even a delay of one day triggers an automatic 5% penalty on the unpaid tax amount, plus compounding interest of 1% per month.
By establishing clear contracts, documenting all board resolutions, and processing payments through structured payroll and accounting workflows, your organisation can easily manage these compliance requirements.
