World Bank wants Kenyans earning below Ksh.32K exempted from housing levy, SHIF

The World Bank wants the Kenyan government to exempt low-income earners from the housing levy and contributions towards the Social Health Insurance Fund (SHIF).

The housing tax, introduced by President William towards an ‘affordable housing project’ to meet what he called poor Kenyans’ housing deficit and give youth job opportunities, was also part of his government’s larger plan to increase tax collection.

Since June 2023, it has seen salaried Kenyans part with 1.5 percent of their monthly pay towards the levy, matched by employers.

But the multilateral lender argues that the “relatively unpopular” tax raises the relative cost of labour, thus reducing formal employment.

In its latest public finance review for Kenya, the World Bank proposes an adjustment to the personal income tax (PIT) structure to exempt low-wage earners from the housing levy.

The lender proposes the waiver for Kenyans earning up to Ksh.32,333 monthly, arguing that this would also improve progressivity with minimal revenue impact.

“A reform that solely repeals the housing levy for low earners—those earning less than half the average wage—without altering tax rates would have a minimal effect on average tax rates, leading to a marginal revenue decline of 0.08 percent of total PIT (personal income tax) and social security contribution revenues,” the report says.

“The resulting decline in revenue would be minimal and can be offset by a marginal levy increase of 0.05 percentage points for above-average earners.”

Similarly, the lender wants the government to review its SHIF policies and waive contributions to the public health scheme for informal workers and low-earners in the formal sector.

SHIF replaced the National Health Insurance Fund (NHIF) last October and has seen Kenyans part with 2.75 percent of their income, with the base contribution being Ksh.300. Informal sector workers are, meanwhile, mandated to contribute 2.75 percent of their household income.

“But the majority do not contribute,” the World Bank report notes, “As a result, SHIF is projected to collect only Ksh.67 billion per year—far below the target Ksh.157 billion.”

The bank argues that the payroll tax design “discourages formalization”, particularly for low-wage workers and small employers who face higher costs when joining the formal sector.

“This creates a structural contradiction: SHIF depends on formalization to succeed yet actively undermines it,” reads the report.

Instead, the World Bank says the government should focus SHIF collections on formal sector workers and finance contributions for informal workers and poor employees.

“Consider removing SHIF contributions for low-wage formal workers. This potential reform could encourage formalization and reduce labour market distortions, as well as cover SHIF services for poor and informal workers and low-wage formal workers, funding the gap through the budget,” it says.