Kenya's Pay-As-You-Earn (PAYE) tax collections exceeded expectations for the first time in three years, reaching Sh598.8 billion in the financial year ending June 2026. This figure surpassed the National Treasury's target of Sh592.1 billion by Sh7.7 billion, marking a 6.7% growth over the previous year.

The improved performance ends a streak of consecutive years where PAYE revenues fell short of government forecasts. In the preceding years, shortfalls ranged from Sh6.1 billion to Sh25.8 billion, reflecting challenges in meeting ambitious revenue targets.

Factors Behind the Growth

  • Formal Employment Gains: Formal sector jobs increased by 101,200 in 2025, reaching 3.315 million workers, indicating a modest recovery in formal hiring.
  • Better Compliance and Higher Earnings: Besides employment growth, enhanced tax compliance and increased taxable incomes contributed to higher PAYE revenue.
  • Shift in Employment Patterns: Despite gains in formal jobs, the formal sector's share of total employment declined slightly from 15.7% in 2022 to 15.3% in 2025, due to rapid job creation in the informal economy.

Challenges Remain

The informal sector continues to dominate new job creation, with 716,800 positions added in 2025, more than seven times formal wage employment growth. This limits the expansion of the PAYE tax base, as informal jobs are generally outside the tax net.

KRA Commissioner General Adan Mohammed noted that while the growth is encouraging, it still lags behind the average 8.5% increases seen in 2022 and 2023. He attributed this to the shrinking proportion of formal employment in the overall job market.

Treasury’s Cautious Target Setting

After several years of missing PAYE revenue goals, the Treasury adopted a more conservative approach in setting the 2025/26 target, increasing it by only 4.5%. This cautious strategy paid off as actual collections outpaced the forecasted growth of 7.01%.

The rise in PAYE collections provides the government with an important boost in domestic revenue amid ongoing fiscal pressures. However, the formal sector has yet to fully recover the approximately 185,800 jobs lost during the COVID-19 pandemic in 2020.