A staff loan at 3% looks generous and costs the employee nothing extra in tax. The cost lands on the employer instead. Under section 12B of the Income Tax Act, an employer who lends to an employee, a director, or a relative of either at less than KRA’s market interest rate pays fringe benefit tax (FBT) on the interest it has given up. The employee’s PAYE doesn’t change. FBT is a separate employer liability that runs alongside the payroll every month the loan is outstanding.
What the tax is charged on
The taxable benefit is the difference between interest at the market rate and the interest the borrower actually pays. FBT is that difference taxed at the corporate rate, currently 30%.
Worked monthly:
| Step | Formula |
|---|---|
| Monthly benefit | Outstanding balance × (market rate − loan rate) ÷ 12 |
| FBT | Monthly benefit × 30% |
The market rate
KRA sets the market interest rate every quarter and publishes it in a public notice. For October, November and December 2026 it is 9%, up from 8% for July to September. The same notice sets the deemed interest rate under section 16(2)(ja), also 9%. That rate deals with interest-free loans from non-resident lenders and has nothing to do with payroll.
Don’t confuse the FBT market rate with the low interest benefit rate under section 5(2A). That is a separate prescribed rate, 8% for July to December 2026, and it applies to loans made before the FBT regime started in June 1998. Hardly any employer still has those on its books. If you do, the benefit is taxed on the employee through PAYE, not as FBT.
Check the rate every quarter. KRA’s notices don’t always arrive before the quarter starts: the October 2026 rate was published on 22 October. Use the rate for the month you are declaring, and if a notice arrives late, recheck the months already worked out.
Worked examples
A car loan at 3%. An employee owes KES 1,200,000 at 3% a year.
| Item | KES |
|---|---|
| Outstanding balance | 1,200,000.00 |
| Rate gap (9% − 3%) | 6% |
| Monthly benefit (1,200,000 × 6% ÷ 12) | 6,000.00 |
| FBT at 30% | 1,800.00 |
The balance falls as repayments come in, so recalculate every month on what’s actually outstanding. A fixed FBT amount that someone entered in January and never updated is the most common error in practice.
An interest-free school fees loan. KES 300,000 outstanding at 0%:
| Item | KES |
|---|---|
| Monthly benefit (300,000 × 9% ÷ 12) | 2,250.00 |
| FBT at 30% | 675.00 |
KRA’s own FAQ uses a similar case: a KES 3,000,000 loan at 3% against a 9% market rate gives a benefit of KES 15,000 a month and FBT of KES 4,500.
The FBT loan calculator runs the same sums for any balance and rate.
Low-interest loans and salary advances
An advance given mid-month and recovered in full from that month’s salary is rarely an FBT issue in practice. There is no balance outstanding when the month closes. Once an “advance” is recovered over several months, it is a loan in substance, and nothing in section 12B carves out advances by name. If your advance policy allows recovery over three or six months at no interest, it’s safest to treat those balances as staff loans and work out FBT. Where you’re unsure how KRA will view a particular arrangement, ask before you file rather than argue it at audit.
Other points that cause trouble:
- Loans to relatives. A loan to a director’s spouse or child counts, even if the relative has never worked for the company.
- Leavers. If a former employee keeps repaying a below-market loan after they leave, FBT continues until the loan is cleared.
- SACCO and bank loans. A loan the employee takes from a SACCO or bank in their own name isn’t an employer loan just because repayments go through payroll.
Declaring and paying
FBT is declared on the monthly PAYE return. On the simplified P10, answer “Yes” to the question on lump sums, gratuity or fringe benefits on the basic information sheet. That opens Sheet D, where you enter for each loan:
- the employee’s PIN and the loan account number
- the original loan amount and the balance outstanding
- the interest rate on the loan and the prescribed market rate, as monthly rates.
The return calculates the FBT and carries it to the tax due on Sheet E with PAYE. FBT is paid with PAYE by the 9th of the following month. October 2026 FBT is therefore due by 9 November 2026.
The penalties follow PAYE: 25% of the tax for failing to remit and 5% for late payment. See the guide to payroll penalties, and the filing calendar for dates.
Keep a loan register
The tax itself is simple. What goes wrong is the bookkeeping. Keep one register of every staff loan and multi-month advance, showing the borrower, start date, rate, monthly balance and FBT. Reconcile it to the staff loans account in your ledger each month. When KRA reviews FBT, it starts by comparing the loans receivable balance in your accounts with Sheet D. A loan that appears in one and not the other is the first question they ask.
For the related P10 steps, see the guide to filing the P10 on iTax.