In a groundbreaking decision delivered on June 23, 2025, the High Court of Kenya ruled that the 2.75% deduction from gross income toward the Social Health Insurance Fund (SHIF) is unconstitutional. The verdict, issued by Justice Lawrence Mwita, declared that the deduction as structured constitutes double taxation and violates the Income Tax Act (Cap 470) and the Constitution of Kenya.
This ruling now challenges how payroll deductions are structured across the country and sets the stage for legal and administrative reforms in Kenya’s health financing model.
What the Ruling Means
The decision directly affects both employers and employees who, since early 2024, have been making or processing SHIF contributions under the new Social Health Insurance Act.
The court determined that:
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Deducting 2.75% of an employee’s gross salary before tax is illegal.
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The implementation lacked proper legal framework and transparency.
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Income already subject to Pay As You Earn (PAYE) cannot be taxed again through a statutory health deduction based on the same gross figure.
This effectively nullifies the current SHIF deduction model, and calls on policymakers to revisit the structure of Kenya’s universal health coverage framework.
Understanding SHIF
The Social Health Insurance Fund (SHIF) was introduced to replace NHIF as a more comprehensive and income-based health financing tool. It required formal employees to contribute a fixed 2.75% of their gross monthly earnings—a structure that sharply increased the cost of healthcare contributions for many Kenyans.
Unlike NHIF’s flat-band system, SHIF’s contribution model directly tied payment to salary levels, which meant higher-income earners paid significantly more.
This model quickly drew concern among legal experts, labor groups, and financial analysts who questioned its fairness and legality—concerns now confirmed by the court.
Immediate Implications for Employers
1. Pause SHIF Deductions from Payroll
Following the ruling, companies should immediately suspend the 2.75% SHIF deduction from employee gross income. Continuing to apply the deduction without a lawful framework could lead to compliance penalties or legal action.
2. Reconfigure Payroll Systems
Businesses using automated payroll software should update configurations to exclude SHIF as a statutory deduction—until or unless further instruction is issued by the Kenya Revenue Authority (KRA) or Ministry of Health.
3. Monitor Legal Developments
Employers should remain alert to new guidance from the National Treasury, Ministry of Health, or KRA, especially if an appeal or amended legislation is introduced to reinstate or restructure SHIF contributions lawfully.
What Employees Need to Know
1. Payslips Will Change
Employees should expect SHIF deductions to stop appearing in payslips going forward. If you notice the deduction continuing, notify your employer or HR department immediately.
2. Refunds May Be Possible
While the court has not ordered immediate refunds, the ruling provides a basis for future claims or adjustments. Employees should keep detailed records of SHIF deductions already made in case a formal reimbursement process is announced.
3. Income Tax Compliance
With the removal of the SHIF deduction from pre-tax income, your taxable income may change slightly. Make sure your updated P9 form at year-end reflects this adjustment correctly.
Broader Impact on Kenya's Payroll and Tax Structure
This ruling will reshape how future deductions—particularly for social protection and public health—are introduced and implemented. It emphasizes:
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The importance of public participation in tax law changes.
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The need for alignment with existing income tax regulations.
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Transparency in how national funds are created, managed, and applied.
It also reaffirms the taxpayer's right to fair and constitutional treatment, even in national welfare reforms.
What Comes Next?
The government may choose to appeal the High Court ruling or introduce new legislation that addresses the legal gaps cited. In the meantime:
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Employers should prioritize compliance and protect employee rights.
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Employees should follow updates from credible government sources and trusted payroll service providers.
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Policy makers must rework the path toward universal health coverage without breaching income tax law.
Stay Compliant with Trusted Payroll Support
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Conclusion
The High Court’s decision to strike down the 2.75% SHIF deduction as unconstitutional is a major win for financial fairness and taxpayer rights in Kenya. As payroll laws continue to evolve, clarity, legality, and transparency must remain the foundation for any statutory deduction.
Both employers and employees should stay informed and act promptly to ensure that their pay structures and statutory compliance remain aligned with the latest legal developments.