Among the types of taxes in Kenya, direct taxes date back to the precolonial era when taxes were collected in kind. Chiefs and village heads collected tax in the form of food or livestock.

Direct taxes are paid directly to the government by individuals or entities based on income, profits, or assets.

In contrast, Indirect taxes are levied on goods and services and are collected by intermediaries (like service providers or retailers) and then passed on to the government.

Key Characteristics of Direct Taxes:

• Progressive in nature: Different tax rates apply to different taxpayers i.e high earners pay more tax.
• Requires filing or returns: Direct taxes mandate taxpayers to declare their income and file their returns within the stipulated timeframe.
• Tax Incidence and burden fall on the same person: This means that the taxpayer bears the brunt of the tax cost directly.
• Collected periodically: Direct taxes have a payment schedule i.e monthly in the case of PAYE, Annually for Corporate taxes or Transaction-based i.e Capital Gain Taxes
• Based on one’s ability to pay: Direct taxes are calculated on income, profit or wealth.

Types of Direct Taxes in Kenya:

1. Income Tax

Income tax applies to all income earned in or derived from Kenya. 

This includes business income, employment income, rental income, pensions, and returns on investments such as dividends and interest.

Applicable areas:

a) Business Income:

•  30% for resident companies, 37.5% for non-resident companies

b) Rental Income:

• Residential: 7.5% on gross rent (Ksh 288,000 – 15 million annually)
• Commercial: Taxed as part of total income (30% for companies, PAYE bands for individuals)

c) Pension Income: 

• Graduated tax rates apply, with exempt thresholds

d) Dividends and Interest:

• Dividends: 5% (residents), 15% (non-residents)
• Interest: 15% for both residents and non-residents

e) Digital Income:

• Digital Service Tax  was repealed in 2023
• Replaced by Significant Economic Presence Tax SEPT: 3% on gross turnover

2. PAYE (Pay As You Earn)

Employers deduct PAYE from employees’ salaries or wages every month and remit to KRA by the 9th of the following month.

Applicability:

Salaries, wages, bonuses, commissions, allowances (e.g., housing, transport)

Rates (2025):

• Ksh 0 – 24,000: 10%
• Ksh 24,001 – 32,333: 25%
• Ksh 32,334 – 500,000: 30%
• Above Ksh 500,000: 35%

3. Corporation Tax

Tax on profits earned by companies and incorporated entities:

• Resident companies: 30%
• Non-resident companies: 37.5%
• Newly listed companies: 25% for first 5 years
• Export Processing Zones: Exempt for 10 years

4. Capital Gains Tax (CGT)

Charged on profits from the sale of land, buildings, or shares.

• Rate: 15% of the net gain
• CGT is considered as a Final tax
• Due within 30 days of the transfer

5. Withholding Tax (WHT)

Tax deducted at source for payments such as dividends, interest, royalties, consultancy, and contract payments.

• Rates: 5% to 20%, depending on the nature of payment and residency
• Final tax in most cases
• Remit by the 20th of the following month

6. Rental Income Tax

Residential Rental Income: 7.5% on gross rent for landlords earning between Ksh 288,000 and 15 million annually. This is a final tax.

Commercial Rental Income: Taxed at 30% for companies, or PAYE bands for individuals. Deductions allowed (e.g., interest, repairs).

7. Significant Economic Presence Tax (SEPT)

Applies to non-resident digital service providers with a significant user base in Kenya.

• Rate: 3% on gross turnover
• Replaced DST in 2023