KRA Sets 8% Interest Rate for Employee Benefit Taxes

The Kenya Revenue Authority (KRA) has issued a public notice announcing new interest rates that will affect employers, employees, and some taxpayers at the start of 2026.

The notice, released under the authority of the Income Tax Act, sets the market and prescribed interest rate at 8 percent for fringe benefit tax, deemed interest, and low interest benefits. These rates will apply for different periods between January and June 2026.

According to KRA, the decision is meant to guide how certain non-cash employee benefits and interest-related tax calculations will be handled. The authority says the rates are prescribed under the law and will be used for tax assessments during the stated months.

For fringe benefit tax, KRA has set the market interest rate at 8 percent under Section 12B of the Income Tax Act. This rate will apply for three months, covering January, February, and March 2026.

Fringe benefit tax mainly affects employers who offer benefits to employees that are not paid in cash. One common example is when an employer provides a loan to an employee at a low interest rate or at no interest. The law requires such benefits to be taxed, and the market interest rate is used to calculate the taxable value.

The public notice also addresses the deemed interest rate under Section 16(2)(ja) of the Income Tax Act. For the same three months, January to March 2026, the prescribed rate of interest will also be 8 percent.

Deemed interest usually applies in cases where a company lends money to related parties, such as directors or shareholders, at below-market rates. In such situations, the tax law assumes an interest income, even if no interest is actually charged.

KRA has reminded taxpayers that a withholding tax of 15 percent will apply on the deemed interest amount.

This tax must be deducted and paid to the Commissioner within five working days. The authority emphasizes that timely payment is important to avoid penalties and interest for late submission.

In addition, the notice covers low interest benefit under Section 5(2A) of the Income Tax Act. For this category, the prescribed interest rate is also set at 8 percent. However, unlike the other two categories, this rate will apply for a longer period.

It will be in effect from January through June 2026, covering six months in total. Low interest benefit generally refers to situations where employees enjoy loans from their employers at interest rates lower than the prescribed rate.

The announcement was issued by the Commissioner for Micro and Small Taxpayers, signaling that small businesses and employers should pay close attention to the changes.

Many small and medium-sized enterprises offer staff loans or other benefits as part of their compensation packages, and these rates will directly affect how much tax they are required to pay.

KRA has encouraged taxpayers to validate all payments to ensure they are credited to the correct KRA accounts.