Bonuses, overtime and commission are employment income like basic pay. KRA lists them among the cash payments chargeable to PAYE, and there is no separate rate for them. What catches people out is timing: Kenyan PAYE is worked month by month, so a large one-off payment is taxed in the month it is paid, on that month’s bands.
Taxed in the month you pay it
The monthly bands don’t know that a bonus covers a whole year’s work. Add a bonus to December pay and December’s taxable pay jumps, so more of it falls into the 30% band or above. The Third Schedule bands in force are:
| Taxable pay (KES a month) | Rate |
|---|---|
| Up to 24,000 | 10% |
| 24,001 to 32,333 | 25% |
| 32,334 to 500,000 | 30% |
| 500,001 to 800,000 | 32.5% |
| Above 800,000 | 35% |
SHIF (2.75%) and the employee’s Housing Levy (1.5%) are charged on gross pay, so they apply to the bonus too. Both are then deducted before PAYE. NSSF depends on how your payroll defines pensionable pay. The examples below treat bonuses and overtime as non-pensionable, so NSSF doesn’t move.
Example 1: a KES 120,000 bonus on KES 80,000 basic
| Item | Without bonus | With bonus | Difference |
|---|---|---|---|
| Gross pay | 80,000.00 | 200,000.00 | 120,000.00 |
| NSSF | 4,800.00 | 4,800.00 | 0.00 |
| SHIF | 2,200.00 | 5,500.00 | 3,300.00 |
| Housing Levy | 1,200.00 | 3,000.00 | 1,800.00 |
| Taxable pay | 71,800.00 | 186,700.00 | 114,900.00 |
| PAYE | 13,923.35 | 48,393.35 | 34,470.00 |
| Net pay | 57,876.65 | 138,306.65 | 80,430.00 |
The employee was already in the 30% band, so the bonus is taxed at 30% after SHIF and the levy come off. Of the KES 120,000, they take home KES 80,430. That’s the figure to give a manager who asks what a bonus will be worth, not the gross.
Example 2: when a lump sum crosses the bands
Lower-paid staff feel the band effect most. Take someone on KES 25,000 basic who gets a KES 15,000 performance bonus.
| Item | Without bonus | With bonus |
|---|---|---|
| Gross pay | 25,000.00 | 40,000.00 |
| Taxable pay | 22,437.50 | 36,800.00 |
| PAYE | 0.00 | 3,423.35 |
| Net pay | 22,437.50 | 33,376.65 |
In a normal month their tax on the bands is covered by the KES 2,400 personal relief, so PAYE is nil. The bonus month runs through the 10%, 25% and 30% bands and PAYE comes to KES 3,423.35.
You must still deduct that. But the employee’s annual return works on the year as a whole. Over twelve months their taxable pay is KES 283,612.50, all inside the annual 10% band of KES 288,000, and the tax is less than the KES 28,800 annual personal relief. On paper the year’s liability is nil, and the PAYE taken in the bonus month shows up as an overpayment in their return. It’s worth telling staff this. KRA has to validate any refund claim, which can take time.
Overtime
There is no overtime exemption today. Kenya used to exempt bonuses, overtime and retirement benefits for employees whose pay sat in the lowest band, but the 2020 amendments to the Income Tax Act removed it. Some payslip templates still carry the old logic. If yours shows overtime as “exempt” for junior staff, fix it.
Overtime goes into gross pay for the month it is paid. Here is KES 6,000 of overtime on KES 35,000 basic:
| Item | Without overtime | With overtime |
|---|---|---|
| Gross pay | 35,000.00 | 41,000.00 |
| SHIF | 962.50 | 1,127.50 |
| Housing Levy | 525.00 | 615.00 |
| PAYE | 1,853.13 | 3,530.60 |
| Net pay | 29,559.37 | 33,626.90 |
Taxable pay moves from KES 31,412.50 to KES 37,157.50, crossing from the 25% band into the 30% band. The employee keeps KES 4,067.53 of the KES 6,000. Commission works the same way: tax it in the month you pay it, not the month the sale closed.
Salary arrears
Arrears come from backdated increases, usually a CBA or an annual review signed late. KRA’s simplified PAYE return has a separate entry for them on Sheet C. You choose “Arrears”, select the year and month the arrears relate to, and enter the arrears amount, the taxable pay for that period and the tax already deducted. The return then works out the PAYE due for that period.
For arrears that relate to earlier years, report them on Sheet C against the periods they belong to. Don’t just add them to this month’s pay. That period’s rule set applies too. NSSF limits and the SHIF and Housing Levy treatment have all changed since 2024, so last year’s arrears can’t be priced on this year’s rates.
Arrears within the current year are where most payrolls take a shortcut. Here is a raise from KES 30,000 to KES 33,000, backdated five months and paid with August pay. The arrears of KES 15,000 are treated as pensionable basic.
| Method | Extra PAYE on the arrears |
|---|---|
| Added to August pay as a lump sum | 3,902.97 |
| Re-run each of the five months at KES 33,000 | 3,365.65 (673.13 a month) |
The lump-sum method costs the employee KES 537.32 more, because it pushes August into the 30% band. The months it relates to stayed in the 25% band. For a few hundred shillings many employers accept the lump-sum method and let the annual return even it out. For large CBA settlements covering many staff, re-run the months and report through Sheet C. If you’re unsure which treatment KRA expects for a particular payment, ask your KRA station before you file, not after.
Where payrolls go wrong
- Paying a bonus through a separate off-cycle run and taxing it on its own. PAYE is worked on the month’s total pay. Two runs in one month still have to be combined, or the second run gets the lower bands and personal relief a second time.
- Forgetting SHIF and the Housing Levy on the bonus. Both are charged on gross pay with no cap, so a KES 1 million bonus carries KES 27,500 of SHIF and KES 15,000 of levy from the employee, plus the employer’s KES 15,000 of levy.
- Mixing up gratuity and arrears. Gratuity, severance and contract lump sums follow their own spreading rules on Sheet C. See the guide to final dues.
- Grossing up without a calculator. If you promise a net bonus, work back from it with the net-to-gross calculator instead of guessing.
To check a bonus month before you run it, use the PAYE calculator.