Taxes Paid by Small Business owners in Kenya

Taxes are a crucial aspect of running a small business in Kenya, as compliance ensures smooth operations and contributes to national development. The tax obligations for small businesses vary depending on their size, turnover, and registration type. Understanding these taxes helps entrepreneurs plan effectively and avoid penalties.
The primary tax for many small businesses is the Turnover Tax (TOT). Introduced to simplify taxation for businesses with an annual turnover between KSH 1 million and KSH 50 million. TOT is set at 1% of gross sales and is filed monthly through the Kenya Revenue Authority’s (KRA) iTax platform. This tax is ideal for small traders, shop owners, and service providers as it reduces the complexity of calculating tax liabilities.
If your business is registered for Value Added Tax (VAT), you must charge 16% on all taxable goods or services and remit this amount to KRA monthly. VAT registration is mandatory for businesses with an annual turnover exceeding KSH 5 million, but smaller businesses can register voluntarily. Ensure proper record-keeping to track VAT collected and offset against expenses. Non-compliance with VAT regulations can lead to hefty fines.
Employers in Kenya are required to deduct and remit Pay As You Earn (PAYE) tax from their employees’ salaries. The amount depends on the employee’s income bracket, as outlined in the KRA tax bands. PAYE also covers statutory deductions such as National Social Security Fund (NSSF) and Social Health Authority Fund (SHA) contributions. For small businesses with staff, timely remittance is essential to avoid penalties.
Annual business permits are another common tax requirement. These vary by county and depend on the type of business. For instance, a retail shop in Nairobi will need a single business permit issued by the Nairobi County Government. The cost varies based on the business’s size and sector. Additionally, businesses involved in importing goods must pay customs duties and, in some cases, excise taxes, depending on the product type.
Corporate taxes apply to businesses registered as limited companies, with the standard rate set at 30% of net profits. Sole proprietors, however, file taxes under their personal PIN, paying based on individual income tax rates. Filing annual tax returns is mandatory for all businesses, even if they did not make a profit during the financial year.
To simplify compliance, small businesses can use the KRA iTax platform to file returns and make payments. Proper bookkeeping is essential for accurate reporting, ensuring all revenues, expenses, and tax obligations are documented. Many small business owners also seek the assistance of tax consultants to navigate complex requirements.
By understanding and fulfilling their tax obligations, small businesses in Kenya can build a solid reputation, avoid legal issues, and contribute positively to the economy. Taxes, while sometimes perceived as burdensome, are essential for long-term growth and sustainability.