Key takeaways
- Step 1: Determine Gross Salary
- Step 2: Calculate NSSF Contributions
- Step 3: Compute PAYE
- Step 4: Determine SHA Contribution
Payroll processing in Kenya involves more than just paying employees their salaries. Employers must correctly calculate and remit four statutory deductions: PAYE to KRA, SHA, NSSF, and the Housing Levy. Getting any of these wrong exposes the business to penalties and legal action. This guide walks through the entire process from gross salary to net pay.
A reliable payroll process is both a calculation workflow and a control workflow. The business must know who prepared the payroll, which salary changes were included, who approved the final run, which statutory schedules were filed, and whether the payment records agree with the payslips. Without those controls, payroll becomes difficult to audit even when the net pay figure looks correct.
This guide was refreshed on 1 July 2026. Use it as an operating checklist, then confirm the current month's statutory rates through KRA, SHA, and NSSF before filing.
Step 1: Determine Gross Salary
Gross salary is the total compensation before deductions. It includes basic salary, house allowance, transport allowance, overtime pay, commissions, and bonuses. If your company provides non-cash benefits such as a company car, housing, or low-interest staff loans, the taxable value of those benefits may also need to be included. Before running payroll, gather salary changes, new hires, exits, unpaid leave, overtime approvals, commissions, staff loans, advances, and benefit records.
Step 2: Calculate NSSF Contributions
NSSF is calculated using Tier I and Tier II limits published by NSSF. For Year 4 contributions effective from February 2026, Tier I applies up to KES 9,000 and Tier II applies above that up to KES 108,000. The employee and employer each contribute 6% within the applicable band. For an employee earning KES 80,000, the employee contribution is KES 4,800 and the employer contribution is also KES 4,800.
Step 3: Compute PAYE
Subtract allowable deductions from gross salary to get taxable income. Depending on the current tax treatment, this may include employee NSSF, approved pension contributions, eligible mortgage interest, Affordable Housing Levy, and SHIF/SHA. Apply the graduated tax bands: 10% on the first KES 24,000, 25% on KES 24,001-32,333, 30% on KES 32,334-500,000, 32.5% on KES 500,001-800,000, and 35% on income above KES 800,000. Then subtract personal relief of KES 2,400 and any applicable insurance relief.
Step 4: Determine SHA Contribution
SHIF/SHA is calculated at 2.75% of gross monthly salary or wage, subject to the current minimum contribution. For example, an employee earning KES 50,000 contributes KES 1,375, while an employee earning KES 80,000 contributes KES 2,200. Do not use the old NHIF fixed bands in current payroll processing.
Step 5: Deduct the Housing Levy
Calculate the Housing Levy at 1.5% of the employee's gross salary. The employer contributes an additional 1.5%. The payroll pack should show the employee deduction on the payslip and the employer contribution in the employer-cost summary. Both sides need to reconcile to the amount remitted through KRA.
Step 6: Calculate Net Salary
Net salary is what the employee takes home after all deductions. The formula is: Net Salary = Gross Salary - PAYE - Employee NSSF - SHIF/SHA - Employee Housing Levy - Other deductions such as loans, advances, SACCO deductions, welfare, union dues, or court orders. Always provide each employee with a detailed payslip showing gross pay, taxable pay, statutory deductions, other deductions, and net pay.
| Item | Amount (KES) |
|---|---|
| Gross Salary | 80,000 |
| Less: NSSF (Employee) | (4,800) |
| Less: SHIF/SHA for taxable-income setup | (2,200) |
| Less: Housing Levy for taxable-income setup | (1,200) |
| Taxable Income | 71,800 |
| Tax on First 24,000 @ 10% | 2,400 |
| Tax on Next 8,333 @ 25% | 2,083 |
| Tax on Remaining 39,467 @ 30% | 11,840 |
| Total Tax | 16,323 |
| Less: Personal Relief | (2,400) |
| Net PAYE | 13,923 |
| Less: SHIF/SHA | (2,200) |
| Less: Housing Levy (Employee 1.5%) | (1,200) |
| Net Salary | 57,877 |
Step 7: Review and Approve the Payroll Run
Before payment, compare the current payroll to the prior month. Look for unexplained changes in gross pay, taxable pay, PAYE, NSSF, SHIF/SHA, Housing Levy, net pay, and employer contributions. A second reviewer should approve the run before payslips are issued or bank payments are released. This reduces fraud risk and catches salary-change errors before staff are paid.
Step 8: Pay Staff and File Statutory Returns
After approval, pay employees through bank transfer, M-Pesa, or the company's approved payment method. Then file and pay statutory obligations through the relevant portals. The payroll pack should include the approved payroll summary, payslips, statutory deduction schedules, payment instructions, filing confirmations, and receipts. Store them together so future audits do not require rebuilding the month from emails and spreadsheets.
Remittance Deadlines and Filing
- PAYE and Housing Levy: Remit to KRA via iTax by the 9th of the following month.
- SHA: Remit via the SHA portal or M-Pesa by the 9th of the following month.
- NSSF: Remit via the NSSF portal or bank by the 15th of the following month.
- Keep copies of all payment receipts and filing confirmations for at least 7 years.
- Issue P9 tax certificates to employees by February 28th each year for the preceding tax year.
Monthly Payroll Close Checklist
- 1Confirm employee master data: names, IDs, KRA PINs, departments, pay basis, bank details, and active status.
- 2Confirm salary changes, allowances, commissions, overtime, bonuses, unpaid leave, exits, and new hires.
- 3Run statutory calculations and review PAYE, NSSF, SHIF/SHA, and Housing Levy totals against the prior month.
- 4Confirm employer-side costs, especially NSSF and Housing Levy, so management sees the true payroll cost.
- 5Approve the payroll run and lock it before payslips or payment files are issued.
- 6File statutory returns, make payments, and save confirmations with the payroll summary.
