PAYE for Employers in Kenya: How to Set Up Payroll, Calculate Deductions, and Remit to KRA

Who This Applies To

If you pay anyone a regular wage or salary — and they are working under your direction, using your tools, on a set schedule — they are an employee, not a contractor. That distinction matters enormously for tax purposes.

As an employer, you are obligated to run payroll for:

• Full-time and part-time employees on a monthly salary
• Casual workers paid weekly or daily, provided the arrangement is ongoing
• Directors and business owners who pay themselves a salary through their own company

The one situation where this doesn't apply: if you hire someone as an independent consultant and they invoice you for their services. In that case, they manage their own tax obligations — though you may be required to deduct Withholding Tax at 5% before paying their invoice, depending on the nature of the work.

For everyone else on a regular payroll, the employer bears the responsibility for deducting and remitting. Not the employee. If the money doesn't reach KRA, KRA comes after you.

The Four Statutory Deductions Every Employer Must Make

There are four things to calculate and remit for each employee on your payroll. Three of them also require a matching employer contribution on top of what you deduct from the employee's salary.

1. PAYE — Pay As You Earn

This is the income tax on employment income, calculated using KRA's progressive tax bands. The employer deducts it from the employee's gross pay and remits the full amount to KRA. The employee pays personal relief of KES 2,400 per month, which reduces their final PAYE bill.

The current tax bands (monthly) are:

• First KES 24,000: 10%
• Next KES 8,333: 25%
• Anything above KES 32,333: 30%

NSSF contributions reduce the taxable income before PAYE is calculated — more on that below.

2. NSSF — National Social Security Fund

Under the revised NSSF Act, contributions are split into two tiers:

• Tier I: 6% on the first KES 7,000 of gross salary. Employee pays KES 420; employer matches KES 420.
• Tier II: 6% on salary between KES 7,001 and KES 36,000. Employee pays up to KES 1,740; employer matches.

For an employee earning KES 36,000 or more, the maximum employee NSSF deduction is KES 2,160 (KES 420 + KES 1,740), and the employer contributes a matching KES 2,160. The NSSF deduction also reduces the employee's taxable income for PAYE purposes.

3. SHIF — Social Health Insurance Fund

SHIF replaced NHIF and is charged at 2.75% of gross salary. Both the employee and the employer pay separately — the employer deducts 2.75% from the employee's gross and also contributes a matching 2.75% on top of the salary cost.

4. Affordable Housing Levy

Introduced in 2023, this is 1.5% of the employee's gross salary deducted from their pay, with the employer contributing a matching 1.5%. Unlike NSSF, the Housing Levy deduction does not reduce taxable income for PAYE.

Step-by-Step: Setting Up Payroll for the First Time

Step 1 — Register as an employer on iTax

If your business already has a KRA PIN, log in to itax.kra.go.ke and add the PAYE obligation: go to Returns → Add Obligation → PAYE. This registers you as a PAYE employer and gives you access to the P10 return form.

You'll also need to register separately with NSSF (through the NSSF online portal) and with SHA for SHIF contributions. The Housing Levy is remitted alongside PAYE through iTax.

Step 2 — Calculate each employee's deductions every month

For each employee, work through the deductions in this order:

1. Start with gross salary
2. Calculate NSSF (employee portion): Tier I + Tier II
3. Calculate SHIF employee deduction: 2.75% of gross
4. Calculate Housing Levy employee deduction: 1.5% of gross
5. Taxable income for PAYE = gross salary minus NSSF (NSSF reduces the PAYE base; SHIF and Housing Levy do not)
6. Apply the PAYE tax bands to the taxable income
7. Subtract personal relief: KES 2,400
8. Result is the PAYE amount to deduct

Step 3 — File the P10 return on iTax by the 9th

The P10 is a monthly return listing every employee on your payroll, their gross salary, and each statutory deduction. You file it on iTax and generate a payment reference number (PRN) for each obligation.

Payment channels:

• PAYE and Housing Levy: M-Pesa Paybill 572572, using the PRN as the account number
• NSSF: via the NSSF online portal or designated banks
• SHIF: via the SHA portal

Step 4 — Issue P9 certificates annually

By 28 February each year, you must issue every employee a P9 certificate covering the previous calendar year. The P9 shows their total gross pay and each deduction made month by month. Employees need this to file their own annual KRA returns. Failing to issue P9s is a compliance gap that frequently comes up during audits.

Worked Example: KES 60,000 Gross Salary

Here is the full calculation for an employee earning KES 60,000 per month.

Employee deductions

PAYE calculation on KES 57,840

Employee's net pay

The Number Most First-Time Employers Miss: What You Actually Pay

Here is the part that surprises nearly everyone setting up payroll for the first time. The statutory deductions above come out of the employee's salary. But three of the four obligations also require a separate employer contribution — money that comes out of your business, on top of the salary you agreed to pay.

So for an employee on a KES 60,000 gross salary, the true monthly cost to your business is KES 64,710. That KES 4,710 doesn't appear on the employee's payslip — it's an obligation sitting on your side of the equation. Across five employees, that's an extra KES 23,550 per month in employer contributions that many small business owners don't budget for until they're staring at the NSSF portal.

This is not a loophole or a surprise tax invented recently. It's been part of the employment cost structure for years. The lesson is simple: when budgeting for a hire, never use the gross salary figure as your cost. Add roughly 7–8% on top for the employer statutory contributions.

Penalties for Late Remittance

The 9th-of-the-month deadline is firm. If you miss it:

• PAYE: 25% of the unpaid tax as a penalty, plus 1% interest per month on the outstanding amount
• NSSF: 5% of the outstanding contributions, plus KES 2,000 per month
• Housing Levy: 3% per month on unpaid amounts

The PAYE penalty is the one to take seriously. Twenty-five percent on the first offence is not a token fine — on a business with several employees, a single late month can result in a significant penalty notice from KRA. Unlike some other jurisdictions, Kenya does not offer a grace period or a first-time warning. The clock starts on the 10th.

If you know you're going to miss a deadline, file the P10 return anyway even if you can't pay immediately. Filing on time while paying late carries a lower penalty burden than both filing late and paying late.

Common Employer Mistakes

These come up repeatedly among small businesses setting up payroll for the first time:

• Treating casual workers as contractors. If someone works on your premises, under your supervision, five days a week — they are likely an employee regardless of what you call the arrangement. The risk of being re-classified and hit with backdated PAYE, NSSF, and penalties falls on you.
• Remitting late because cash is tight. Set the PAYE money aside when you run payroll, not on the 8th of the following month when you're scrambling.
• Forgetting employer contributions. The NSSF, SHIF, and Housing Levy employer contributions are separate obligations from the deductions. You owe all of them.
• Not issuing P9 certificates. Employees who don't receive their P9 by February often can't file their own annual returns. That's their problem on paper, but in practice it falls back to HR to sort out.
• Not filing a nil return for months with no staff. If you've registered as a PAYE employer and had no employees in a given month, you still need to file a nil return. Dormant employer accounts accumulate late-filing penalties just like active ones.

The Honest Summary

Payroll compliance in Kenya is not optional once you have staff, and the deadlines are unforgiving. The mechanics — four deductions, matched employer contributions on three of them, filed and paid by the 9th — are straightforward once you've done it a few times. The part that trips up most first-time employers isn't the maths, it's the budget surprise: the real cost of a KES 60,000 salary is KES 64,710, and that gap matters when you're growing a team.

Get your PAYE employer obligation registered on iTax before you make your first payroll run. Use the worked example above as a template. And set a calendar reminder for the 7th of each month — two days before the deadline — to file and pay. The penalty for missing it is too steep to risk on a scheduling oversight.