How to Prepare Payroll in Kenya: A Step-by-Step Guide for 2025

Why Payroll Preparation Matters in Kenya

Imagine this: payroll day arrives, the accounts team hits “send” and two days later you receive a penalty notice from KRA plus phone calls from several employees saying their pay slips are wrong. Payroll isn’t just a spreadsheet exercise it’s a legal obligation, a trust contract with staff and a major reputational and cash-flow risk for your business.

If you’re asking “How to prepare payroll in Kenya so I don’t get it wrong?” you’re in the right place. This guide walks you through the complete, practical payroll process in Kenya for 2025: what to collect, how to calculate gross to taxable to net pay (with a worked example), which statutory deductions to apply, remittance deadlines, common mistakes to avoid and how automation can remove most human error.

This guide summarizes statutory rules as at 25 September 2025. Kenya’s payroll rules have changed recently, notable updates include revised PAYE bands, phased increases and limits for NSSF, the replacement of NHIF with SHIF and the Affordable Housing Levy (employee and employer) all of which we use in the worked examples below. For legal certainty always KRA, NSSF, Social Health Authority and Affordable Housing Levy.

What you’ll get from this guide:

• A clear practical 7-step payroll process you can follow every month.
• An up-to-date statutory deductions table (PAYE, NSSF, SHIF, Housing Levy) with citations so your calculations are defensible.
• A worked example in Kenyan currency showing gross, taxable and net pay using 2025 rates.
• A compliance checklist you can download and a small pay slip template you can adapt.
• Practical tips to reduce errors and a short comparison of manual vs automated payroll so you can decide what’s best for your business.

If you want the high-level why of switching to cloud payroll first (the business case and benefits), see our pillar post: Why Kenyan businesses are switching to cloud payroll software. For pain points and real employer problems that lead people to automate, see our cluster pieces: Common payroll challenges in Kenya and The Ultimate Guide to Payroll in Kenya.

Ready? Let’s start with the prerequisites, the records and registrations every employer need before the first calculation.

Step-by-Step Payroll Process in Kenya (2025)

Payroll in Kenya follows a structured cycle. Think of it as building blocks: each stage depends on the one before it. Skip one and you risk compliance penalties or unhappy employees. Let’s break it down into seven clear steps you can follow every month.

Step 1: Collect Employee Information

The payroll journey starts with employee data. Without complete and correct records, every other step is flawed.

Key information to collect and maintain includes:

• Personal details: full names (as per ID), KRA PIN, NHIF/SHIF number, NSSF number, bank details.
• Employment details: job title, employment contract, start date, salary structure, allowance entitlements.
• Declarations & benefits: PAYE exemption (if applicable), pension membership, Sacco contributions, loans or salary advances.

For a deeper breakdown of payroll record keeping requirements in Kenya, check our Ultimate Guide to Payroll in Kenya cluster content.

Pro tip: KRA requires employers to keep payroll records for at least 7 years. Missing or incomplete records may trigger audits and fines.

Step 2: Determine Gross Salary

Gross salary is the foundation of all calculations. It includes:

• Basic pay (fixed monthly wage).
• Allowances (house, transport, hardship, medical, overtime).
• Benefits in kind (company car, housing benefit, etc.).

Story Example:
A Nairobi-based SME once mistakenly classified housing allowance as a reimbursement instead of taxable income. When KRA audited them, they were fined KSh 400,000 in back taxes plus penalties. This shows why correct classification at the gross salary stage is critical.

Step 3: Apply Statutory Deductions (2025)

This is the stage most employers struggle with and also where compliance is most heavily policed. In 2025, the main statutory payroll deductions in Kenya are:

1. PAYE (Pay as You Earn)

• Based on progressive tax bands.
• For 2025, the updated PAYE brackets range from 10% to 35%.
• Personal relief = KSh 2,400/month.

2. NSSF (National Social Security Fund)

Contributions are in two tiers.

• Tier I: 6% of pensionable earnings up to KSh 7,000.
• Tier II: 6% of earnings between KSh 7,001 – 36,000.
• Employer matches the same amount.

3. SHIF (Social Health Insurance Fund, replacing NHIF)

Rates in 2025 are income-based (progressive), ranging from 2.75% to 5% of gross salary, capped at a maximum deduction. Replaces the old flat NHIF system.

4. Affordable Housing Levy

• Employee contributes 1.5% of gross salary.
• Employer matches with another 1.5%.

At this point in the payroll process, you’ve got:

• Gross salary.
• Minus PAYE, NSSF, SHIF, and Housing Levy.
• A provisional taxable salary, net pay figure.

Step 4: Factor in Other Deductions or Benefits

Beyond statutory deductions, employers may need to apply voluntary or contractual deductions. These can include:

• Pension schemes (employer or employee contributions beyond NSSF).
• Sacco deductions for employees who are members.
• Loan repayments (salary advances or employer-guaranteed bank loans).
• Union dues or welfare deductions.

Employers must ensure deductions are authorised in writing by the employee to remain compliant with the Employment Act.

Step 5: Calculate Net Salary

This is where everything comes together. Net salary = Gross pay – (Statutory deductions + Other deductions).

We covered how payroll mistakes can affect net pay in Common Payroll Challenges in Kenya.

Example: Salary of KSh 60,000 in 2025

1. Gross Salary = 60,000
2. Statutory deductions:
3. PAYE: KSh 9,000 (after relief, exact per KRA table)
4. NSSF: KSh 2,160 (Tier I & II combined)
5. SHIF: KSh 1,800 (3% of gross, depending on bracket)
6. Housing Levy: KSh 900 (1.5% of gross)
7. Other deductions: Sacco = KSh 1,000

Net Salary = 60,000 – (9,000 + 2,160 + 1,800 + 900 + 1,000)
= KSh 45,140.

Try out our PAYE calculator for an interactive approach towards gross salary deductions.

Step 6: Generate Pay slips

Employers are legally required to provide itemized pay slips showing:

• Employer and employee details.
• Gross salary.
• Each statutory deduction separately.
• Other deductions.
• Net pay.

Pay slips can be generated manually in Excel, but cloud payroll solutions such as SkillMind’s HR Genie AI-powered CloudWage simplifies this by auto-calculating deductions and issuing pay slips instantly.

For why automation makes pay slip errors almost impossible, see our pillar blog on cloud payroll software.

Step 7: Remit Statutory Contributions

This step is critical. Deducting PAYE, NSSF, Housing Levy or SHIF but failing to remit to the authorities on time is a major offence.

Deadlines:

• PAYE: 9th of the following month as highlighted by KRA.
• NSSF: 9th of the following month via the NSSF portal.
• SHIF contributions: By the 9th day of the following month, as per theSocial Health Authority (SHA).
• Housing Levy: Submitted together with PAYE.

Penalties for late remittance:

PAYE (Income Tax on Salaries)

According to KRA:

• Late filing of the PAYE return: the greater of 25% of the tax dueor KSh 10,000
• Late payment (i.e. not remitting the deducted tax by due date):
    • Penalty = 5% of the tax due
    • Interest = 1% per month (or part of a month) on the unpaid amount until full payment
• Failure to deduct & account for PAYE: penalty = the higher of 25% of the “tax involved” or KSh 10,000

You can see these penalty rules laid out on KRA’s “More about PAYE” FAQs.

Affordable Housing Levy (AHL / Housing Levy)

Under the Affordable Housing Levy Act, 2024, the penalty for late remittance is:

• 3% per month (or part thereof) on the unpaid amount, accruing until the amount is paid.
• This penalty is recoverable as a civil debt from the person liable to remit the levy

Prior drafts or news sources had suggested 2% per month for late remittance, but the Act as passed sets it at 3%. Check out Kenya Revenue Authority’s guide on penalty fees to be incurred.

SHIF (Social Health Insurance Fund)

From Kenya Healthcare federation regulation summaries:

• Failure to make timely SHIF contributions, 2% penalty of the unpaid contribution for the period in question.
• Additionally, an employer can be liable to a fine not exceeding KES 2 million or imprisonment up to 3 years or both for failing to pay contributions / making unauthorized deductions.

NSSF (National Social Security Fund)

From National Social Security Fund website:

• Failure to make timely NSSF contributions, a penalty of 5% of the total contributions for each month or part of the month that the payment is late.

By Step 7, you’ve:

• Paid employees correctly.
• Issued compliant pay slips.
• Submitted statutory deductions on time.
• Protected your business from penalties.

Payroll Compliance Checklist in Kenya

Running payroll in Kenya isn’t just about paying employees, it’s about staying compliant. Missing a single deduction or deadline can cost your business heavily in fines, interest and even reputational damage.

Here’s a step-by-step compliance checklist every employer should follow in 2025:

1. Register with Statutory Bodies

• Kenya Revenue Authority (KRA): Employer PIN for PAYE remittance.
• National Social Security Fund (NSSF): Mandatory pension scheme.
• Social Health Authority (SHA, formerly NHIF): For SHIF deductions.
• Housing Levy registration: Managed under KRA portal.

For details on why compliance failures hurt Kenyan businesses, see our blog on common payroll challenges.

2. Maintain Accurate Employee Records

• Employee PIN certificate.
• Contract details (gross salary, allowances).
• Bank account details for salary disbursement.
• Signed deduction authorization (for loans, Sacco, etc.).

The Kenya Employment Act requires contracts and clear wage records.

3. Apply Correct Statutory Deductions

• Use KRA PAYE tables or payroll software.
• Deduct NSSF as per Tier I & II rules.
• Deduct SHIF based on gross pay % bracket.
• Deduct housing levy at 1.5% employer + 1.5% employee.

4. Issue Pay slips (Digital or Printed)

Pay slips must be:

• Timely (issued alongside pay).
• Transparent (showing all deductions).
• Accessible (digital payroll systems make storage easier).

5. Remit Deductions on Time

• PAYE: 9th of following month.
• NSSF: 9th of following month.
• SHIF: 9^th of following month.
• Housing levy: Alongside PAYE.

6. File Monthly Returns

• KRA iTax portal for PAYE.
• NSSF employer portal.
• SHA portal for health contributions.

Late filing = automatic penalties, even if payments were made.

7. Adopt Payroll Automation

Manual spreadsheets may work for very small teams but create risk. Cloud payroll software ensures:

• Instant deduction updates.
• Auto-generated pay slips.
• Compliance alerts for deadlines.
• Integration with accounting systems.

Worked Example: Payroll Compliance for a Mid-Sized Kenyan Company

Imagine ABC Manufacturing Ltd. with 20 employees each earning KSh 50,000 gross.

1. Total gross payroll = KSh 1,000,000.
2. Statutory deductions per employee (approximate 2025 values):
3. PAYE: KSh 7,500 – KSh 150,000 (all employees).
4. NSSF: KSh 2,160 – KSh 43,200.
5. SHIF: KSh 1,500 – KSh 30,000.
6. Housing Levy: KSh 750 – KSh 15,000.
7. Total deductions = KSh 238,200.
8. Net payroll disbursed = KSh 761,800.
9. Compliance actions taken:
10. PAYE remitted via iTax by 9th.
11. NSSF & SHIF remitted via employer portals by 9th.
12. Pay slips generated and issued.

By following this checklist, ABC Ltd. avoids penalties and demonstrates good governance.

Payroll Mistakes to Avoid in Kenya

Even the most well-meaning HR or finance team can make payroll mistakes. The consequences? Unhappy employees, compliance penalties or worse, a damaged reputation. Let’s look at the most common mistakes Kenyan businesses make and how you can avoid them.

Missing Statutory Deadlines

KRA, NSSF and SHA are unforgiving. Even a one-day delay results in automatic penalties and interest charges.

Fix: Automate reminders through payroll software such as AI-powered HR Genie’s CloudWage or set internal deadlines a week before the official due date.

Misclassifying Allowances & Benefits

According to theKenya Revenue Authority, some employers are unaware of what falls under what. Check out their detailed compliance list of what goes as allowance or benefit

Example: Treating house allowance or transport allowance as non-taxable when they actually attract PAYE.

Fix: Always cross-check against KRA guidelines or use payroll systems with updated tax rules.

Poor Record Keeping

Many SMEs keep payroll data in fragmented Excel files. This makes audits a nightmare.

Fix: Centralize employee data in a secure, cloud-based system. See why business are opting to switch to cloud based payroll software solutions.

Manual Calculations for PAYE

Here’s a quick story:

A Nairobi-based SME once under-deducted PAYE for six months because their finance clerk misapplied the KRA tax bands. The company ended up paying back taxes plus penalties amounting to over KSh 500,000.

This is not unusual, manual payroll leaves too much room for error.

Fix: Automate calculations to reflect the latest PAYE bands and statutory rates.

Not Issuing Pay slips

Pay slips aren’t optional, they’re a legal requirement under the Employment Act. Failing to provide them erodes employee trust and can result in disputes.

Fix: Generate digital pay slips that employees can access anytime.

Ignoring Employee Queries

Payroll errors affect people’s livelihoods. Delayed responses or poor communication can escalate small mistakes into formal disputes or resignations.

Fix: Have a clear payroll query resolution process.

Question ForYou

If you’re an HR or finance professional reading this:

Have you ever had to deal with a payroll error that cost your business time, money or employee trust? How did you resolve it?

Drop your thoughts in the comments. Your story might help another business owner avoid the same pitfall.

Frequently Asked Questions on Payroll in Kenya

1. How do you prepare payroll in Kenya step by step?

To prepare payroll in Kenya:

1. Gather employee details (gross pay, allowances, benefits).
2. Apply statutory deductions (PAYE, NSSF, SHIF, housing levy).
3. Calculate net pay.
4. Generate pay slips.
5. Remit deductions to KRA, NSSF, and SHA within deadlines.

See our Ultimate Guide to Payroll in Kenya for a detailed breakdown.

2. What are the deadlines for payroll deductions in Kenya?

• PAYE: 9th of the following month.
• NSSF: 9th of the following month.
• SHIF: 9^th of the following month.
• Housing levy: Submitted together with PAYE.

3. Do I need payroll software to run payroll in Kenya?

No, but it’s highly recommended. Manual spreadsheets work for very small teams, but payroll software saves time, reduces errors, and keeps you compliant.

Learn why Kenyan businesses are switching to cloud payroll software.

4. How is PAYE calculated in Kenya in 2025?

PAYE is calculated based on graduated tax bands issued by KRA. For example, the first portion of income may be taxed at 10%, the next at 25%, etc., minus a personal relief. Payroll systems automatically apply these bands.

5. What happens if I don’t file payroll deductions on time?

Late filing attracts automatic penalties and interest, even if the payment was made. For example, PAYE penalties = 25% of the tax due or KSh 10,000, whichever is higher.

6. How do I generate pay slips in Kenya?

You can generate pay slips manually in Excel, but digital payroll systems allow employees to securely access pay slips anytime and reduce HR workload.

7. What is included in a Kenya payroll compliance checklist?

• Employer registration with KRA, NSSF, SHA.
• Employee records updated.
• Statutory deductions correctly applied.
• Timely remittance & returns filed.
• Pay slips issued.

Conclusion: Preparing Payroll in Kenya the Smart Way

Preparing payroll in Kenya can feel overwhelming with multiple statutory deductions, strict deadlines and constant regulatory updates, it’s easy to make costly mistakes. But with the right checklist, compliance practices and payroll tools, you can turn what feels like a headache into a seamless, transparent process.

Whether you’re a startup handling your first employee or an established SME scaling operation, the principle remains the same: accuracy, compliance and efficiency are the pillars of payroll success.

And here’s the truth; the businesses thriving in 2025 are the ones embracing automation. Manual processes may get the job done today, but tomorrow they could cost you in penalties, wasted time, and employee dissatisfaction.

Ready to simplify payroll and stay compliant every month?
Explore why Kenyan businesses are switching to cloud payroll software and see how SkillMind can help you run payroll accurately, on time, and stress-free.