Kenya Finance Act 2026: Key Tax Changes and Their Impact on Taxpayers

1. Individual income tax returns will be filed earlier

From 1 January 2027, individuals will be required to file their annual income tax returns by the end of the fourth month following the end of the year of income. For individuals whose year of income ends on 31 December, the annual return deadline will therefore move from 30 June to 30 April of the following year. Companies and other taxpayers that are not individuals will continue to file their annual returns by the end of the sixth month following the end of their accounting period.

Impact on taxpayers: Individuals will have less time to finalize their records and file accurate returns. Taxpayers with employment income, rental income, business income or investment income should maintain their records throughout the year rather than waiting until the filing deadline.

2. KRA will introduce pre-populated tax returns

The Finance Act formally provides for pre-populated tax returns generated using information available to the Commissioner. KRA will be required to notify taxpayers when a pre-populated return is issued and provide it by the end of January of each year. Taxpayers will have two months to review, confirm or amend the information before filing.

Impact on taxpayers: Tax compliance will become increasingly data driven. Taxpayers will need to reconcile their accounting records, eTIMS invoices, withholding tax certificates and other third-party information with the information held by KRA. A pre-populated return should not simply be accepted without review. The taxpayer remains responsible for ensuring that the information submitted to KRA is complete and accurate.

3. Tax amnesty has been extended

The Finance Act reopens the tax amnesty for tax liabilities arising up to 31 December 2025. Taxpayers can benefit from a waiver of interest, penalties and fines where the principal tax is paid by 31 December 2026.

Impact on taxpayers: Businesses and individuals with historical tax liabilities have an opportunity to settle the principal tax without paying the associated interest, penalties and fines covered by the amnesty. Taxpayers with outstanding KRA liabilities should review their tax ledgers and assess whether they qualify before the 31 December 2026 deadline.

4. Withholding tax applies to interchange and merchant service fees

The definition of management or professional fees has been expanded to include interchange fees and merchant service fees arising from card transactions. These payments can therefore fall within the withholding tax framework. The applicable rate is generally 5% for payments to residents and 20% for payments to non-residents, subject to applicable tax treaty provisions.

Impact on taxpayers: Banks, payment service providers, merchants and businesses making affected payments will need to review their payment arrangements and withholding tax processes. The additional tax cost may ultimately affect transaction charges and pricing.

5. Digital payment network charges can be treated as royalties

The Act expands the definition of royalty to cover payments for the use or right to use proprietary digital payment card networks or platforms. The provision covers payments described as service fees, transaction fees, network fees, assessment fees or processing fees where they relate to the use of the relevant payment network or platform.

Impact on taxpayers: Businesses making payments to non-resident digital payment networks should review their contracts and payment flows to determine whether withholding tax applies. The change is particularly relevant to banks, fintech companies, payment processors and other businesses operating within digital payment ecosystems.

6. Residential rental income tax has increased

The Finance Act increases the residential rental income tax rate from 7.5% to 10% of gross rental income for taxpayers within the Monthly Rental Income regime.

Impact on landlords: Eligible residential landlords will have a higher monthly tax liability. For example, a landlord receiving Ksh 100,000 in monthly residential rent will have a rental income tax liability of Ksh 10,000 under the 10% rate, before considering the applicable statutory framework. Landlords should therefore review their rental records, tax registration and monthly filing arrangements.

7. New tax framework for non-resident rental income

The Act introduces a specific final tax regime for non-resident persons earning rental income from property situated in Kenya. Non-resident landlords are required to register under a simplified framework and file and pay the applicable tax by the twentieth day of the month following the month in which the rent is received.

Impact on taxpayers: Foreign property owners earning rental income from Kenya will face clearer direct tax compliance obligations. Property managers and resident agents acting for non-resident landlords should also review their withholding tax responsibilities. The applicable rate under the new regime requires careful consideration of the final statutory provisions and any subsequent guidance issued by KRA.

8. Bad debt deductions have been clarified for financial institutions

The Act clarifies that qualifying bad debts incurred by money lenders, banks and regulated financial institutions can include the principal amount, interest and other amounts relating to the debt, subject to the Commissioner's guidelines.

Impact on taxpayers: Banks, microfinance institutions and other qualifying lenders may have greater certainty when claiming deductions for debts that have become irrecoverable.

9. VAT treatment of labour outsourcing costs has been clarified

Where a supplier provides labour outsourcing or employee placement services, employee related costs such as salaries, wages and statutory deductions are treated as disbursements made on behalf of the client. VAT therefore applies to the service fee or margin rather than the employee related costs.

Impact on businesses: Labour outsourcing companies may experience a lower VAT cost on the employee related component of their services. Businesses should review their contracts, invoices and accounting systems to ensure that the service fee and employee costs are appropriately separated.

10. VAT refunds on bad debts will take longer

The period before a taxpayer can claim a VAT refund relating to bad debts has been increased from two years to three years.

Impact on businesses: Businesses with significant unpaid customer invoices may have to wait longer before recovering VAT associated with bad debts. This may create additional cash flow pressure. Businesses should strengthen credit control, debt collection and customer credit assessment processes.

11. Input VAT may need to be reversed when taxable supplies become exempt

The Act introduces rules requiring businesses to account for input VAT previously claimed where taxable goods become exempt while still unsold. The affected input VAT must be adjusted in the VAT return for the period in which the supplies become exempt.

Impact on taxpayers: Businesses dealing in products that have moved from taxable to exempt status will need to monitor inventory and VAT classifications carefully. Failure to make the required adjustment could result in additional tax liabilities.

12. New VAT relief for certain large infrastructure projects

The Act introduces VAT exemptions for certain qualifying infrastructure projects, including approved Public Private Partnership projects and specified large LPG storage infrastructure. For LPG storage tanks and related infrastructure, the investment must meet the statutory threshold and approval requirements.

Impact on investors: Qualifying infrastructure projects may benefit from reduced upfront VAT costs, improving project cash flow and potentially lowering the overall cost of investment.

13. New excise duty on imported wood and timber products

The Act introduces a 30% excise duty on specified imported wood and timber products, including certain MDF, particle board, block board, plywood and timber products.

Impact on businesses: Importers in the construction, furniture and manufacturing sectors may experience higher input costs. Businesses may need to reconsider sourcing strategies and assess the competitiveness of locally produced alternatives.

14. Excise duty on certain plastic and advertising materials

Specified imported banner sheeting, flex banner, PVC sheeting and plastic sheets are now subject to excise duty at prescribed rates.

Impact on businesses: Advertising companies, printers, packaging businesses and other users of affected imported materials may experience increased costs. Businesses should review pricing and procurement arrangements to account for the additional tax burden.

15. PAYE tax bands have not changed

Despite earlier discussions around possible changes to PAYE tax bands, the Finance Act, 2026 does not revise the existing PAYE tax bands.

Impact on employees: There is no new PAYE rate or revised PAYE band introduced by the Finance Act, 2026. Employers should therefore continue applying the prevailing PAYE framework unless further legislation changes the position.

Key insights for taxpayers

The Finance Act, 2026 signals a continued shift towards stronger digital tax administration and closer monitoring of taxpayer transactions.

• Businesses should review their accounting systems, tax computations, eTIMS records, withholding tax processes, VAT classifications and contractual arrangements.
• Individuals should ensure that all sources of income are properly recorded and prepare for the shorter individual tax return filing period that takes effect from January 2027.
• Landlords should review their rental income tax obligations, while businesses with historical tax liabilities should assess whether they can benefit from the tax amnesty before 31 December 2026.
• Taxpayers should also distinguish between measures that were proposed in the Finance Bill and measures that were ultimately enacted. Several highly publicised proposals, including the proposed 25% excise duty on mobile phones and the deemed dividend provision, were removed during the legislative process.

Conclusion

The Finance Act, 2026 does not simply introduce new taxes. Its more significant effect is the strengthening of tax administration, expansion of withholding tax, changes to VAT treatment, targeted excise duty measures and increased use of taxpayer data.

For businesses and individuals, the practical message is clear. Tax compliance is becoming increasingly data driven, transaction based and time sensitive. Businesses that maintain accurate records, reconcile their tax data regularly and review their tax positions proactively will be better placed to manage the changes and minimise compliance risks.

Altic Consult can assist businesses and individuals with tax health checks, tax compliance reviews, VAT and withholding tax advisory, rental income tax compliance, KRA audits and tax dispute support.