Kenya’s tax authority has announced an 8% benchmark interest rate that will be used to assess fringe benefit tax, deemed interest, and low-interest employment benefits for the first half of 2026, providing clarity for employers, lenders, and payroll administrators across the country.
In a public notice dated 22 January 2026, the Kenya Revenue Authority (KRA) confirmed that the prescribed market interest rate under the Income Tax Act will remain at 8% for various tax computations covering the months from January to June 2026, depending on the category of benefit involved.
The announcement, issued by the Commissioner for Micro and Small Taxpayers, outlines how the rate will apply to fringe benefit tax, deemed interest on loans, and low-interest benefits extended to employees.
These rates are used by tax authorities to determine the taxable value of non-cash benefits and employer-supported financing arrangements.
For the purposes of Section 12B of the Income Tax Act, the KRA stated that the market interest rate for calculating fringe benefit tax will be 8%. This rate will apply for the three-month period covering January, February, and March 2026.
Fringe benefit tax is charged when an employer provides an employee with a benefit, such as a loan at an interest rate below the prescribed market rate. The difference between the market rate and the rate charged to the employee is treated as a taxable benefit.
By reaffirming the 8% rate, the tax authority has provided employers with a clear benchmark for assessing the tax implications of staff loan schemes and similar benefits during the first quarter of the year.
The same 8% rate will also apply to deemed interest under Section 16(2)(ja) of the Income Tax Act for January, February, and March 2026.
Deemed interest typically arises when loans are extended between related parties, such as shareholders and companies at no interest or at below-market rates.
In such cases, the law assumes interest income based on the prescribed rate, even if no actual interest is charged.
The KRA reiterated that a withholding tax rate of 15% applies to the deemed interest amount. This tax must be deducted and remitted to the Commissioner within five working days, underscoring the authority’s emphasis on timely compliance.
Tax professionals note that delays or miscalculations in withholding tax on deemed interest can expose businesses to penalties and interest charges, making accurate application of the prescribed rate particularly important.
For low-interest benefits provided to employees, the KRA confirmed that the 8% prescribed rate will apply for a longer period, covering January, February, March, April, May, and June 2026.
Low-interest benefits often arise where employers provide loans to staff at concessional rates as part of remuneration packages or employee welfare programmes.
The taxable benefit is calculated by comparing the interest charged to the employee with the prescribed rate.
By extending the applicability of the 8% rate to the end of June, the authority has given employers greater certainty for payroll planning over the first half of the year.
The confirmation of a uniform 8% rate across fringe benefit tax, deemed interest, and low-interest benefits is expected to simplify tax computations for employers, particularly small and medium-sized enterprises.
Payroll managers and finance teams rely on these prescribed rates to determine taxable benefits accurately, ensure correct withholding, and avoid disputes during tax audits.
For employees, the rate influences the tax cost of employer-provided loans, potentially affecting take-home pay where fringe benefits are involved. While the rate does not change the nominal interest charged by employers, it determines how much of the benefit is treated as taxable income.
Do you have any story or press releases you want to share? Send tips to editor@envestreetfinancial.com
Follow us on Twitter, Facebook, or LinkedIn to ensure you don’t miss out on any