The World Bank is urging the Kenyan government to exempt low-income earners from mandatory contributions to the housing levy and the Social Health Insurance Fund (SHIF), arguing that the deductions are hurting formal employment and discouraging economic formalisation.
In its latest Public Finance Review for Kenya, the multilateral lender recommends reforms to the personal income tax (PIT) system, particularly proposing that Kenyans earning less than Ksh.32,333 monthly be spared from contributing to the housing levy introduced in June 2023.
Under the current structure, salaried workers and their employers each contribute one point five percent of the employee’s gross monthly income to fund President William Ruto’s affordable housing programme—part of a broader tax expansion plan aimed at tackling the housing deficit and youth unemployment.
However, the World Bank argues that the levy increases labour costs and disproportionately affects low-income earners, thereby discouraging formal employment.
“A reform that solely repeals the housing levy for low earners—those earning less than half the average wage—would have a minimal effect on average tax rates, leading to a marginal revenue decline of 0.08 percent of total PIT and social security contribution revenues,” the report notes.
To compensate for the minimal loss, the Bank suggests a modest increase of 0.05 percentage points in contributions from higher-income earners.
The World Bank has also raised concerns about SHIF, which replaced the National Health Insurance Fund (NHIF) in October 2024. The Fund requires workers to contribute two point seven five percent of their income, with a minimum of Ksh.300. Informal sector households are similarly expected to contribute based on their total income.
But with the majority of informal workers opting out of the scheme, SHIF is expected to collect just Ksh.67 billion annually—well below its Ksh.157 billion target.
The report warns that current SHIF policies are counterproductive.
“This creates a structural contradiction: SHIF depends on formalisation to succeed, yet actively undermines it,” the World Bank observes.
To address this, the Bank recommends exempting low-wage formal workers from SHIF contributions and instead funding their healthcare coverage through the national budget. This, it argues, would help reduce labour market distortions, encourage formalisation, and better support poor and informal workers.
“Consider removing SHIF contributions for low-wage formal workers. This potential reform could encourage formalisation and reduce labour market distortions, as well as cover SHIF services for poor and informal workers,” the Bank advises.
The proposals come as Kenya grapples with public discontent over rising taxes and cost of living, amid mounting pressure on the government to strike a balance between revenue generation and economic inclusivity.
