In Kenya, running payroll isn’t simply about paying your staff their gross salaries; it involves correctly deducting statutory obligations and remitting them to the right authorities. If you’re an employer, HR professional, finance manager or even an employee wanting to understand your payslip, this article is designed for you.
Statutory deductions serve two major purposes: first, they ensure employees are covered under social security, health insurance and other state-mandated schemes; second, they protect businesses by ensuring compliance with tax and labour laws. Mistakes can lead to penalties, interest and operational headaches.
For Kenyan businesses—whether small, medium or large—and for any organisation looking to sign on with a trusted payroll partner like Spondoo Kenya, understanding the details of Pay As You Earn (PAYE), National Social Security Fund (NSSF), the new Social Health Authority (SHA) framework (which replaces the old National Hospital Insurance Fund (NHIF)), and the Affordable Housing Levy (AHL) is essential.
By the end of this article, you’ll have a clear understanding of each major deduction, how to calculate them, how they impact your payroll operations and how Spondoo Kenya can support you.
Kenya’s statutory deduction landscape is grounded in several core laws and regulated by specific agencies. Here are the key components:
Regulatory agencies you should know:
KRA – Responsible for administering income taxes and PAYE.
NSSF Board – Manages pension contributions.
SHA – Oversees health insurance schemes (SHIF, PHF, ECCIF) as of October 1, 2024.
PAYE is an income tax withheld from an employee’s salary by the employer before the employee receives pay. The employer acts as the collection agent for KRA. It applies to all employment income including wages, salaries, bonuses, allowances (unless exempt), and commissions.
Any employee who receives employment income. The deduction must be made monthly, and the employer registers with iTax, deducts the income tax, and remits it by the specified due date.
As of the 2025/26 fiscal year, for monthly taxable income after allowable deductions, the bands are approximately:
0 – KSh 24,000: 10%
KSh 24,001 – 32,333: 25%
Above ~KSh 32,334: 30%
Personal relief of KSh 2,400 per month (KSh 28,800 per annum) is applied to reduce the tax payable.
Employers must:
Register each employee on iTax.
Deduct the correct PAYE each payroll cycle.
File a monthly PAYE return via Form P10 and remit the tax by the 9th working day of the following month.
Let’s take an example:
An employee earns a gross monthly salary of KSh 120,000 (no special allowances for simplicity).
Taxable employment income = 120,000 (assuming no pre-tax deductions).
First band: KSh 24,000 @ 10% = KSh 2,400.
Second band: KSh 8,333 (@ 25%) = KSh 2,083.25 (since 32,333 – 24,000 = 8,333).
Remaining: 120,000 – 32,333 = 87,667 @ 30% = KSh 26,300.10.
Total tax before relief = 2,400 + 2,083.25 + 26,300.10 ≈ KSh 30,783.35.
Less personal relief (2,400) = ~KSh 28,383.35.
Therefore net PAYE ≈ KSh 28,383.
Common mistakes: Mis-classifying allowances (some are taxable, some exempt); forgetting personal relief; late filing/remittance which triggers penalties.
The National Social Security Fund is Kenya’s mandatory pension scheme for employees working under a contract of service. It ensures retirement, disability and death benefits.
All employees working under contract in Kenya (formal sector) must contribute. Employers must register the organisation and remit contributions for each employee.
For 2025, the approach is:
Both employee and employer each contribute 6% of pensionable earnings.
There are two Tiers: Tier I applies to earnings up to ~KSh 8,000; Tier II covers earnings above that up to an Upper Earnings Limit (~KSh 72,000).
The employer deducts the employee’s share and pays both shares to NSSF by the 9th of the following month, including a monthly return. Non-compliance can lead to 5% penalty and 1% monthly interest.
The National Hospital Insurance Fund (NHIF) was Kenya’s public health insurance scheme for formal and informal sectors. However, it had limitations in terms of coverage, efficiency and inclusivity. In response, government enacted the Social Health Insurance Act, 2023, to replace NHIF with the Social Health Authority (SHA).
The SHA began operations on 1 October 2024, taking over NHIF’s functions and managing three funds:
The Primary Healthcare Fund (PHF)
The Social Health Insurance Fund (SHIF)
The Emergency, Chronic & Critical Illness Fund (ECCIF)
The aim is universal health coverage (UHC), including informal-sector workers and vulnerable populations.
This is a significant shift from the old NHIF rates (which were flat-rated by category) into a percentage-based model tied to gross salary.
The Affordable Housing Levy was introduced as part of the government’s agenda to mobilise funding for the affordable housing programme. It mandates contributions from both employees and employers.
Effective March 2024, the contribution rate is 1.5% of gross monthly salary from the employee, and a matching 1.5% from the employer (total 3%).
Employers must ensure they deduct the employee’s portion, match it, and file the return/retain records. Failure triggers penalties (e.g., 3% per month outstanding).
For payroll systems:
Deduct 1.5% of gross salary from the employee.
Add 1.5% employer contribution (expense for employer).
Record in payroll ledger and include in monthly statutory remittance package.
Report via iTax (sheet M) by the 9th of following month.
Common oversight: forgetting to capture the employer’s match or mis-applying the base (gross salary vs taxable) which leads to under-remittance.
While PAYE, NSSF, SHA/AHL are major, other statutory obligations may apply:
National Industrial Training Authority (NITA) levy – based on number of employees or wages in some cases.
It’s vital that payroll teams maintain a checklist of statutory obligations so nothing falls through the cracks.
A typical monthly payroll timeline for Kenyan employers:
Close payroll (input gross salaries, allowances, deductions).
Calculate statutory deductions (PAYE, NSSF, SHA, AHL, etc).
Prepare remittance documents:
PAYE: Form P10 via iTax
AHL: sheet M of P10
NSSF: via NSSF portal or registered agent
SHA: remit to SHA via portal/USSD
Remit/Pay by the 9th working day of the following month.
Issue payslips and keep accurate records (7+ years recommended).
Audit readiness: ensure registers, bank slips, iTax uploads, NSSF returns are filed.
Missing the deadline or mis-filing can trigger penalties, which brings us to the next section.
Non-compliance can cost your business:
Penalties: For example, late AHL remittance can attract 3% per month.
Interest: For NSSF late contributions, 1% per month on unpaid amounts.
Reputational risk: Employees may complain, regulators may audit, business operations can be disrupted.
Operational errors: Mis-calculated taxes, wrong reliefs applied, incorrect matching contributions.
Best practice checklist:
Use a payroll calendar with reminders for deadlines.
Ensure payroll software is up to date with latest rates and bands.
Reconcile actual deductions vs payments made.
Train HR/finance personnel on statutory changes (e.g., SHA introduction, AHL).
Consider outsourcing to experts if internal capacity is thin — this is where Spondoo Kenya comes in.
At Spondoo Kenya, we specialise in outsourcing payroll, statutory-deduction processing and compliance support for Kenyan employers. Here’s how we add value:
Expert knowledge: We stay current on changes like SHA, AHL, NSSF tier adjustments.
Accuracy & automation: Reduce manual calculation errors, apply correct reliefs, match contributions properly.
Timely remittances: We handle filing forms (P10, sheet M) and remittances to KRA, NSSF, SHA.
Scalability: Whether you have 5 staff or 500, we scale with you.
Peace of mind: Free up your HR/finance team to focus on core business, while we handle compliance.
Transparent pricing: Clear service levels and deliverables.
If you’re seeking a partner to manage payroll and statutory deductions, sign up with Spondoo Kenya today and rest assured you’re compliant, accurate and efficient.
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