Take a two-person software company. The two founders each own half the shares and both are directors. The company sells subscriptions to its own product, and in its first full year it expects about Ksh 2,400,000 in receipts, or Ksh 200,000 a month. Hosting, tools and other running costs come to about Ksh 240,000 a year.
Each step below is an option the law gives, and most add a monthly return.
Turnover tax instead of corporation tax
A resident person, a company included, pays turnover tax when its turnover from business is more than Ksh 1,000,000 and not more than Ksh 25,000,000 in a year[1][2]. The rate is 1.5% of gross receipts[3], and the return and payment are due by the 20th of the following month[4]. It is a final tax, and no costs come off before it is worked out[2].
Corporation tax for a resident company is 30% of profit[5]. On Ksh 2,400,000 of receipts and Ksh 240,000 of costs, that is 30% of 2,160,000, or Ksh 648,000. Turnover tax on the same year is 1.5% of 2,400,000, or Ksh 36,000. Costs still take cash out of the company; under turnover tax they simply stop reducing the tax.
A company with thin margins, or one making a loss, can come out ahead on corporation tax. The law lets it opt out of turnover tax by writing to the Commissioner[6].
The Ksh 1,000,000 line
Turnover tax starts only when the year's turnover is more than Ksh 1,000,000. At or below that figure, the company is back on corporation tax on its profit:
| Turnover for the year | Tax regime | Tax, with Ksh 240,000 of costs |
|---|---|---|
| 900,000 | Corporation tax, 30% of 660,000 | 198,000 |
| 1,100,000 | Turnover tax, 1.5% of 1,100,000 | 16,500 |
| 2,400,000 | Turnover tax, 1.5% of 2,400,000 | 36,000 |
If the year looks like landing near the line, work out the total in November, while there is still time to act on it.
What turnover tax leaves out
Turnover tax does not apply to rental income, to management, professional or training fees, or to income that has already borne a final withholding tax[7]. The Act counts technical and consultancy services as management or professional fees[8].
For a software company, that splits the income in two. Subscription and licence income from its own product is inside turnover tax. A consulting day, custom development for one client or a paid support retainer is outside it and is taxed at 30% of profit. Put the two kinds of work on separate invoices with separate descriptions, so the split is plain to anyone reading the books.
A small salary for each founder
Under turnover tax a salary does not lower the company's tax, because nothing does, and a dividend costs less per shilling. A small salary can still make sense: it pays the founders for the part-time work they do as employees, and it builds NSSF savings for each of them. The aim is to keep it below the point where PAYE starts.
PAYE is 10% on the first Ksh 288,000 of taxable pay in a year, which is Ksh 24,000 a month[9], and a resident employee gets personal relief of Ksh 28,800 a year, or Ksh 2,400 a month[10]. The housing levy and SHIF come off before PAYE is worked out[11], and so does NSSF, as a pension contribution[12]. At Ksh 9,000 a month, each founder pays no PAYE:
| Each founder, per month | Ksh |
|---|---|
| Gross salary | 9,000.00 |
| NSSF Tier I, 6% | 540.00 |
| SHIF, 2.75% with a Ksh 300 minimum | 300.00 |
| Housing levy, 1.5% | 135.00 |
| Taxable pay | 8,025.00 |
| PAYE: 10% is 802.50, less 2,400 of relief | 0.00 |
| Net pay | 8,025.00 |
NSSF's lower earnings limit is Ksh 9,000 from February 2026, so the whole contribution is Tier I[13]. SHIF is 2.75% of gross salary and never less than Ksh 300 a month[14], and the housing levy is 1.5% of gross salary[15]. On top of the salary, the company pays its own NSSF of 540, a housing levy of 135 that matches the employee's[16], and the NITA levy of Ksh 50 a month[17]. Each founder costs the company Ksh 9,725 a month. SHIF has no employer share.
PAYE stays at nil up to a gross salary of about Ksh 26,740 a month. That is where taxable pay reaches Ksh 24,000 and the 10% tax on it equals the relief. There is no reason to go higher under turnover tax: every extra shilling of salary carries NSSF, SHIF and the housing levy, which together take more than the 5% a dividend costs.
A salary this low is only lawful for genuinely part-time work. The current minimum wage order sets hourly rates as well as monthly ones[18], so write the hours into each founder's contract and keep the hourly pay above the rate for the job.
The returns that come with a payroll
Once the company has employees, it files the P10 PAYE return every month by the 9th, even when there is no PAYE to declare[19]. The same return carries the NITA levy[17]. NSSF[20] and SHIF[21] are due by the 9th as well, and the housing levy by the ninth working day after the month ends[22].
A PAYE return filed late costs the higher of 25% of the tax due or Ksh 10,000[23]. With no tax due, that is Ksh 10,000 for every month missed. Tax paid late costs a further 5%[24] and interest of 1% a month[25]. The PAYE return tool on this site prepares the P10 file for upload to the iTax portal.
Dividends and the 5% withholding tax
Whatever is left after costs, turnover tax and payroll belongs to the company, not to the founders. The way to pay it to them is a dividend, and a company may pay one only out of profits[26]. For a resident individual, the company withholds 5%, and that is a final tax[27]. It remits the tax with a return within five working days of deducting it[28].
The Income Tax Act treats cash or assets that a company passes to a shareholder, or spends for a shareholder's benefit, as a dividend, whatever the payment is called[29]. So every shilling that moves from the company to a founder should be one of four things: salary, a dividend, a refund of a documented business expense, or a loan. A loan to a director at less than the market interest rate brings fringe benefit tax with it[30], as Fringe benefit tax in Kenya explains.
Section 7A of the Act taxes dividends paid out of untaxed profits. KRA's notice on it says it does not apply where the income has already borne a final tax[31], and turnover tax is one. The 5% is the whole charge on the dividend.
Medical cover, paid straight to the insurer
Medical insurance that an employer pays for is not taxable pay, and the law extends this to a director who controls more than 5% of the company[32]. For a director who is not a whole-time service director, the tax-free value is capped at Ksh 1,000,000 a year[33]. Each founder here owns half the company, so each has that cap.
Two conditions come with it. The insurer has to be approved by the Commissioner of Insurance, and the company should pay the insurer itself: the Act exempts insurance paid for by the employer, and a refund of a premium a founder paid personally is easily read as pay.
Premiums paid this way come out of money that would otherwise go out as a dividend, so each shilling of genuine premium also saves the 5% withholding on it. The exemption only lowers the cost of cover the founders would buy anyway.
Pension, once there is a real salary
Contributions to a registered pension fund come off taxable pay, up to the lowest of what was paid, 30% of pensionable income, and Ksh 360,000 a year[34]. On a salary of Ksh 9,000, 30% is Ksh 2,700 a month, so a private pension adds little until a founder draws a real salary. Until then, NSSF Tier I is the pension.
The year's figures
| Where the Ksh 2,400,000 goes | Ksh a year |
|---|---|
| Running costs, paid by the company | 240,000 |
| Turnover tax at 1.5% | 36,000 |
| Two salaries of Ksh 9,000 a month | 216,000 |
| Employer NSSF, housing levy and NITA on them | 17,400 |
| Medical cover for both founders, paid to the insurer | 200,000 |
| Paid out as dividends | 1,690,600 |
| Withholding tax on the dividends, at 5% | 84,530 |
NSSF goes into the founders' own accounts, so leave it aside. The rest of the tax and levies come to Ksh 135,410: turnover tax, the dividend withholding, SHIF, both halves of the housing levy and NITA. That is about 5.6% of receipts. Under corporation tax, the same year would carry about Ksh 518,000 of corporation tax alone, before any dividend.
VAT registration at Ksh 5,000,000
Turnover tax runs up to Ksh 25,000,000 a year, but VAT comes much sooner. Registration is compulsory once taxable supplies reach Ksh 5,000,000 in any twelve months, or are expected to, and the application is due within 30 days[35]. That is about Ksh 417,000 a month. Exported services are zero-rated[36], and a zero-rated supply is still a taxable supply[37], so sales to customers abroad count toward the Ksh 5,000,000. KRA's own guidance says a turnover tax payer who crosses the line has to register for VAT[2]. Watch the twelve-month total every month.
Records and the calendar
Keep the books in Kenya shillings, and keep every record for five years[38]. A business has to issue its invoices through KRA's electronic tax invoice system, eTIMS[39]. Give the company its own bank account, record each payment to a founder under what it is, and keep consulting work on its own invoices.
The dates that recur:
- By the 9th: the P10 PAYE return with NITA, then NSSF and SHIF, all for the month before.
- By the ninth working day after the month ends: the housing levy.
- By the 20th: the turnover tax return and payment.
- Within five working days of paying a dividend: the withholding tax and its return.
- Within six months of the year end: the company's income tax return[40].
- By 30 April: each founder's own income tax return, starting with the 2026 year. The Finance Act 2026 moved individuals from the sixth month after the year to the fourth[41].
All payments to KRA can go through the government PayBill 222222, with the payment slip number as the account[42].
This is general information, not advice for your company. The law and KRA's rates change, so check each figure against the linked source, or with a licensed tax agent, before you rely on it.