Finance Bill 2025 Proposes Fivefold Increase in Tax-Free Per Diem for Employees

The Kenyan Cabinet has endorsed the Finance Bill 2025, signalling a significant shift in the nation’s fiscal policy with a focus on providing tax relief to citizens and enhancing the efficiency of tax administration. 

The proposed legislation, now headed to Parliament for deliberation, aims to boost disposable incomes, curb tax evasion, and promote fiscal responsibility, all within the framework of the Bottom-Up Economic Transformation Agenda (BETA). One of the immediate highlights of the bill is the proposed increase in the per diem allowance for employees, a move that directly impacts those who travel for work. The current tax-free daily allowance of Ksh2,000 for expenses such as meals, accommodation, and local transport is set to rise to Ksh10,000. 

This fivefold increase is designed to provide a tangible boost to the take-home earnings of employees who frequently travel for work, offering them greater financial flexibility. In tandem with the per diem adjustment, the Finance Bill 2025 mandates that employers apply all eligible tax reliefs and exemptions when calculating Pay As You Earn (PAYE) taxes. This provision addresses a long-standing issue where some employers have bypassed these reliefs, leaving employees to navigate the complex process of claiming refunds from the Kenya Revenue Authority (KRA). 

By streamlining this process, the government aims to simplify tax compliance for both employers and employees, ensuring that workers directly benefit from their entitled tax deductions without bureaucratic hurdles. The bill also sets its sights on the digital economy, a sector that has experienced rapid growth in recent years as Kenyans increasingly turn to online platforms for goods, services, and entertainment. A key proposal is the elimination of the 1.5% Digital Service Tax (DST). 

Previously levied on revenue generated from digital transactions by non-resident companies without a permanent establishment in Kenya, the DST covered a wide range of services, including streaming platforms and digital marketplaces. By abolishing the DST, the government intends to alleviate the financial burden on consumers and stimulate activity in the digital marketplace.

Further supporting the digital economy, the Finance Bill 2025 proposes a reduction in the tax rate on cryptocurrency transactions from 3% to 1.5%. This move is expected to position Kenya as a more attractive hub for cryptocurrency enthusiasts and fintech investors, signalling a broader strategy to attract technological innovation and financial technology enterprises. To ensure that multinational platforms operating in Kenya contribute fairly to the local economy, the government plans to introduce a tax framework based on the concept of Significant Economic Presence (SEP). 

This measure is designed to capture revenue from companies that generate substantial economic value within Kenya without having a physical presence, while also avoiding undue financial strain on residents. Beyond tax reforms, the Finance Bill 2025 underscores a commitment to fiscal discipline and budgetary efficiency. Recognising the exploitation of tax refund claims, the government has outlined measures to close loopholes that have previously enabled fraudulent claims.

These reforms are being accompanied by substantial revisions to the 2025/26 Financial Year budget, estimated at Ksh4.3 trillion. These adjustments are expected to include austerity measures aimed at reducing public debt vulnerabilities, enhancing fiscal discipline, and creating fiscal space for critical public investments.