Treasury Cabinet Secretary John Mbadi has outlined a raft of income tax changes in the 2025/2026 Budget, aimed at boosting revenue collection while easing the burden on Kenyan workers and businesses.
While presenting the budget estimates before the National Assembly, Mbadi announced that the Finance Bill 2025 would introduce reforms to eliminate ambiguities in tax laws and promote equity within the tax system.
Among the notable changes is the full exemption of all gratuity payments, whether from the public or private sector, from taxation.
This move follows the enactment of the Tax Laws (Amendment) Act, 2024, which had exempted pensions and gratuity payments but left uncertainty around gratuities from private pension schemes.
This means retirees across both public and private sectors will take home their full terminal benefits without any deductions, offering financial relief to thousands of Kenyans exiting the workforce.
“To eliminate any confusion, we are now proposing an amendment to clarify that all gratuity payments are exempt from tax,” Mbadi stated.
In a move targeting cross-border tax disputes involving multinationals, the Bill will also empower the Kenya Revenue Authority (KRA) Commissioner to enter into Advance Pricing Agreements (APAs) with multinational companies. This is expected to reduce litigation and ensure predictable tax treatment for global firms operating in Kenya.
For local businesses, the Treasury has proposed accelerated tax relief on industrial and operational items, such as linen and tools.
Under the new plan, businesses will be allowed to deduct the full cost of qualifying items in the year of purchase, a departure from the current practice of spreading deductions over three years.
To promote home ownership, the Finance Bill proposes expanding mortgage interest relief to include individuals who take loans to construct their own residential homes. Currently, this relief is only available for mortgages used to purchase or improve existing homes.
If passed, the change will allow Kenyans building their own homes to benefit from tax relief on interest paid on construction loans, just like those buying or renovating houses. The move aims to make home ownership more affordable and inclusive.
“These measures are designed to stimulate economic activity, promote fairness in tax treatment, and provide clarity in implementation,” the CS added.
The proposed changes are expected to take effect in the new fiscal year, subject to parliamentary approval of the Finance Bill.
