Payroll is more than just a monthly payslips. It is the backbone of employee satisfaction, tax compliance, and business operations. In Kenya, payroll management sits at the intersection of labor law, taxation, and technology, making it both an operational necessity and a strategic function.
Kenya’s payroll framework is shaped by legislation from multiple government bodies, primarily the Kenya Revenue Authority (KRA), the National Social Security Fund (NSSF), and the Social Health Authority (SHA), formerly NHIF. Employers are required to calculate, deduct, and remit statutory contributions on behalf of their employees in compliance with:
Pay As You Earn (PAYE): A progressive tax deducted from employees’ salaries based on income brackets, ranging from 10% to 35%.
NSSF Contributions: Pension contributions under the tiered system introduced by the NSSF Act 2013, aimed at securing employees’ retirement income and is set to increase in the month of February of each year.
SHA (formerly NHIF) Deductions: Health insurance contributions at 2.75% of basic salary, with a minimum of Kshs 300, channeled into the national health scheme.
Other Deductions: This includes the Housing Levy (1.5% of basic pay), Sacco contributions, loan repayments, and voluntary insurance premiums.
Non-compliance can attract heavy penalties, interest charges, and legal consequences, underscoring the need for accuracy and timeliness.
Payroll Challenges in Kenya (and Practical Solutions)
1. Frequent Legislative Changes
Kenya’s tax and labour environment is highly dynamic, with amendments introduced almost every year through the Finance Act. From the introduction of the Housing Levy, to the transition from NHIF to SHA, to new PAYE relief rules, payroll teams must constantly adapt their systems and processes. The challenge lies not only in keeping software up to date but also in ensuring that HR and finance staff understand and implement these changes correctly. Without proactive monitoring, companies risk penalties, backdated liabilities, or non-compliance.
Employers should subscribe to official updates from KRA and professional bodies like ICPAK, ensure payroll software vendors issue timely system updates, and schedule regular compliance training for payroll officers. A payroll compliance calendar aligned with statutory deadlines also reduces risks.
2. Data Security Risks
Payroll data contains sensitive employee information such as salaries, bank details, national ID numbers, and tax records. With the shift to digital payroll systems and cloud platforms, cyberattacks and data breaches are a growing concern. A single incident of compromised payroll data can erode employee trust and attract legal action under Kenya’s Data Protection Act. Employers must therefore treat payroll security as a critical business risk.
Businesses should adopt multi-factor authentication, encrypt payroll data, restrict system access to authorised staff only, and conduct periodic data protection audits. Partnering with trusted payroll service providers that are GDPR- or ISO-certified also enhances compliance with global data standards.
3. Integration with Finance and HR Systems
In many Kenyan companies, payroll, HR, and finance functions still operate on separate systems. This lack of integration leads to duplication of work, reconciliation challenges, and delays in reporting. For example, an employee promotion may be updated in the HR system but not reflected in payroll, resulting in salary errors or disputes. Integrated platforms reduce inefficiencies by syncing employee data in real time, improving accuracy and speeding up compliance reporting.
Companies should invest in integrated Human Resource Management Systems (HRMS) or Enterprise Resource Planning (ERP) tools that bring payroll, HR, and finance under one digital roof. Even SMEs can adopt cloud-based payroll solutions that automate data flow across departments and reduce manual intervention.
4. Employee Awareness and Payslip Literacy
A common payroll challenge is that employees often do not fully understand the deductions appearing on their payslips. Terms such as SHA, PAYE relief, FBT, or Housing Levy can be confusing, leading to mistrust and disputes. This lack of financial literacy means employees may suspect unfair deductions even when the payroll is accurate. Low awareness also prevents workers from appreciating the benefits of statutory contributions like NSSF or SHA.
Employers should prioritise payroll education by issuing payslip guides, hosting short training sessions, or using internal communication channels to explain changes such as the Finance Act 2025 updates. Clear communication builds trust, reduces disputes, and strengthens employee morale.
Finance Act 2025: Payroll Changes Every Employer Must Note
The Finance Act 2025, effective from 1 July 2025, has introduced important payroll updates:
Automatic Application of PAYE Reliefs: Increases take-home pay accuracy and reduces KRA refund backlog. Employers are now mandated to automatically apply all relevant PAYE reliefs and exemptions when calculating employees’ salaries. Employees will no longer need to file for refunds with KRA — their net pay will reflect reliefs at source. Example: An employee earning KSh 100,000 with KSh 5,000 in insurance relief will now see it deducted from taxable income immediately, improving take-home pay without waiting months for a refund.
Increased Per Diem Allowance: Employees travelling for work gain more untaxed income, while employers must adjust payroll policies to reflect the new ceiling. The tax-free threshold for daily subsistence/per diem allowance has increased from Kshs 2,000 to Kshs 10,000.No receipts are required for this allowance to be exempt. Example: A three-day Nairobi–Mombasa work trip can now attract KSh 30,000 tax-free, compared to just KSh 6,000 previously.
Gratuity Payments Now Exempt from PAYE: Employees retain full gratuity payouts; payroll systems must stop applying PAYE deductions on gratuities. Gratuity payments, whether from public or private sector retirement schemes, are now exempt from income tax. Previously, only certain gratuities qualified. Example: An employee receiving a KSh 1 million gratuity package will keep the full amount, instead of losing up to KSh 300,000 to PAYE.
Fringe Benefit Tax (FBT) Clarification: Payroll teams must continue calculating FBT using the corporate rate, not individual income tax bands. The Act clarifies that FBT (charged on low-interest or interest-free employer loans and certain benefits) will remain pegged to the corporate income tax rate (currently 30%).
Confirmation of SHA (Social Health Authority) Deductions: SHA, introduced under the Finance Act 2023 and now fully in force, continues to require a 2.75% gross salary deduction comprising of basic salary, basic salary arrears and recurrent allowances. Payroll officers must ensure compliance with the new SHA regime and avoid legacy “NHIF” labels in payslips. Payroll must continue deducting 2.75% of gross salary for SHA (formerly NHIF).This deduction has no upper limit and a minimum of Kshs 300.
These changes mark a significant shift toward employee-friendly tax treatment, while also demanding accuracy and readiness from payroll teams.
The Future of Payroll in Kenya
The future is pointing toward full automation, AI-driven compliance monitoring, and real-time payroll reporting. As remote and hybrid work models gain traction, payroll systems will increasingly handle cross-border payments, multi-currency salaries, and flexible benefits packages.
However, the human factor remains critical. Payroll professionals are not just number crunchers, they are compliance guardians, employee welfare advocates, and strategic partners in business growth.
For Kenya’s workforce and businesses to thrive, payroll must be treated as more than a back-office function. Investing in modern payroll systems, keeping abreast of legislative changes such as the Finance Act 2025, and promoting financial literacy among employees will not only ensure compliance but also build trust and morale in the workplace.
