With the enactment of the Finance Act 2024 Kenya, one of the most notable tax reforms has been the inclusion of the Affordable Housing Levy (AHL) as an allowable deduction in payroll tax computation. This change has had a direct impact on how Pay As You Earn (PAYE) is calculated for employees across the country.
Employers and payroll professionals must now adjust their processes to reflect this development — a step that not only ensures compliance with the law but also affects how much tax each employee pays.
Understanding the Affordable Housing Levy (AHL)
The Affordable Housing Levy is a government-mandated deduction aimed at funding public housing projects. Initially introduced as a flat deduction, it has evolved in structure and legal status following successive Finance Bills.
As of December 2024, the Affordable Housing Levy is now classified as an allowable deduction, meaning it is deducted before calculating PAYE.
What Are Allowable Deductions?
Allowable deductions are specific items legally subtracted from an employee’s gross salary to arrive at the taxable income. These reduce the income upon which PAYE is calculated.
Other common allowable deductions include:
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NSSF contributions
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Mortgage interest
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Pension contributions
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Insurance relief
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And now: Affordable Housing Levy and Social Health Insurance Fund (SHIF)
How the Affordable Housing Levy Affects PAYE
Before the Change (Pre-Dec 2024):
PAYE was calculated on gross income, and AHL was deducted after PAYE was computed. This meant the full gross salary was subject to taxation.
After the Change (Post-Dec 2024):
The AHL is now treated as a pre-tax deduction, reducing the gross income before PAYE is applied. This results in lower taxable income and, ultimately, less tax payable by the employee.
Sample Calculation
Let’s consider an employee earning a gross monthly salary of KSh 100,000.
New PAYE Calculation Under Finance Act 2024:
| Description | Amount (KES) |
|---|---|
| Gross Salary | 100,000 |
| NSSF Contribution | 2,160 |
| Affordable Housing Levy | 1,500 |
| SHIF Contribution | 2,500 |
| Total Allowable Deductions | 6,160 |
| Taxable Income | 93,840 |
PAYE is now calculated on KSh 93,840, not the full KSh 100,000. This lowers the amount of tax withheld from the employee's salary.
Why This Matters
For Employers:
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Payroll systems must be updated to reflect the new treatment of AHL.
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Using the old PAYE model will result in over-deducting PAYE, leading to employee complaints or KRA disputes.
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Employers are responsible for issuing updated P9 forms showing AHL as an allowable deduction.
For Employees:
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Net pay may increase slightly due to lower PAYE.
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Employees should review their payslips and confirm that AHL is listed as a pre-tax deduction.
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When filing returns in 2025, employees must use the updated KRA P9 form that reflects the new format.
The KRA P9 Form and Compliance
To support the changes introduced by the Finance Act 2024, the Kenya Revenue Authority (KRA) updated the P9 form format to include Affordable Housing Levy and SHIF under allowable deductions.
This is critical for accurate tax return filing in 2025. Employers must adopt this new format for payroll processing and end-of-year reporting.
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Conclusion
The Affordable Housing Levy's reclassification as an allowable deduction is a major milestone in Kenya’s payroll taxation system. It offers employees a slight tax relief while challenging employers to update their payroll operations in line with the new law.
Understanding how AHL affects PAYE is not only essential for compliance, but it also contributes to fairer taxation and better payroll transparency across the country.