How the New NSSF Rates Will Affect Salaried Kenyans’ Net Salary Starting February 2025

How the New NSSF Rates Will Affect Salaried Kenyans’ Net Salary Starting February 2025

Salaried Kenyans are bracing for a decrease in their take-home pay at the end of February 2025 as the third phase of the NSSF Act comes into effect.

The government plans to increase deductions from the payslips of employees earning a monthly salary, regardless of their income level.

These deductions are mandatory, and employers are also required to match employee contributions, which will further raise the cost of doing business in Kenya due to the higher deductions and levies.

Currently, the minimum pensionable income is set at Ksh7,000, while the maximum is capped at Ksh36,000.

This means the highest NSSF deduction is Ksh2,160 from the employee, with an equal amount deducted from the employer, totaling Ksh4,320.

Starting February 2025, the minimum pensionable income will rise from Ksh7,000 to Ksh8,000, and the maximum will increase to Ksh72,000.

As a result, the NSSF Tier 1 deduction will go up from Ksh420 to Ksh480, while the Tier 2 limit will increase from Ksh1,740 to Ksh3,840.

Overall, the limit on NSSF deductions will rise from Ksh2,160 to Ksh4,320, which employers will also match.

For instance, a Kenyan earning Ksh50,000 will see their NSSF contribution increase from Ksh2,160 in January to Ksh3,000 in February, leading to a reduction in net pay from Ksh39,617 to Ksh39,029 after other taxes, such as the housing levy, are deducted.

Similarly, an employee earning Ksh80,000 will now contribute Ksh4,320, up from Ksh2,160, resulting in a decrease in net pay from Ksh59,724 to Ksh58,212.

The NSSF contribution structure has been revamped, introducing a two-tier system that replaces the previous NSSF Act (Cap 258). This new law was signed in December 2013 and was initially set to take effect in January 2014, but its implementation was delayed for nearly ten years due to legal challenges.

On February 21, 2024, the Supreme Court of Kenya ruled in favor of implementing the National Social Security Fund (NSSF) Act 2013, overturning a previous Court of Appeal decision that had blocked the deductions.

As a result, February salaries, typically processed in early March, will be reduced according to the new two-tier system.

Additionally, new mandatory deductions for Kenya’s Social Health Insurance Fund (SHIF) and housing levy have pushed the total deductions from workers’ payslips to unprecedented levels of 40-45% of gross pay, surpassing deduction rates in many Western countries and leaving some employees with less than a third of their gross pay after loan repayments.

The implementation of the 2.75% SHIF deduction, following the 1.5% housing levy introduced in July 2023, along with anticipated increased NSSF contributions, has significantly reduced workers’ disposable income and purchasing power, leading to a 15-20% decline in retail and consumer goods sales according to the Federation of Kenya Employers.

The impact is reflected in Kenya Revenue Authority data showing a rare 2.89% year-on-year drop in average gross monthly pay for private sector workers to Sh75,781 between June and September 2024, the first such decline in 30 years.

This reduction in take-home pay has forced companies to pause hiring or shift to casual employment, while the Purchasing Index indicates falling demand for goods and services, prompting businesses to either shut down or scale back operations.

The misalignment in Kenya’s revenue collection strategy, juxtaposed with its fiscal ambitions, is a recurring dilemma rooted in the historical overreliance on formal sector taxation.

This echoes a colonial-era legacy where payroll levies formed the backbone of revenue systems in highly structured economies—systems ill-suited to Kenya’s 80% informal workforce.

Globally, progressive economies have pivoted toward consumption-based taxation, leveraging its non-discriminatory nature to distribute the tax burden more equitably across all income strata.

An alternative strategy could involve implementing a universal levy or consumption tax, such as a marginal increase in VAT or an excise duty on non-essential goods.

This method would distribute the financial burden more equitably across the population, ensuring consistent revenue streams without stifling economic activity.

Such a shift could alleviate pressure on formal sector employees while maintaining the government’s fiscal objectives, highlighting a need for innovative policy solutions that align with Kenya’s unique economic structure.

Failure to address these systemic issues will only exacerbate existing inequalities and hinder Kenya’s development goals.