The Kenya Revenue Authority (KRA) has announced new prescribed interest rates that will apply to employer-issued loans and related tax obligations during the second half of 2026.
In a public notice issued by the Commissioner for Micro and Small Taxpayers, the tax authority set the market interest rate for Fringe Benefit Tax (FBT), deemed interest and low interest benefits at 8 per cent, with different application periods depending on the type of tax.
The revised rates are intended to guide employers and taxpayers in calculating tax obligations arising from employee loans issued below the prevailing market interest rate.
New rates take effect immediately
According to KRA, the Fringe Benefit Tax (FBT) rate under Section 12B of the Income Tax Act has been fixed at 8 per cent for the period running from July to September 2026.
The authority also set the deemed interest rate under Section 16(2)(ja) of the Income Tax Act at 8 per cent for the same three-month period.
In addition, the low interest benefit rate has been maintained at 8 per cent, but it will remain in force for a longer period—from July to December 2026.
KRA said the prescribed rates will serve as the benchmark when determining taxable benefits arising from concessionary or interest-free loans offered by employers.
What the changes mean for employers
The tax changes mainly affect employers who provide loans to employees at interest rates below the prescribed market rate.
Where an employer charges less than the approved 8 per cent interest rate, or issues an interest-free loan, the difference between the charged rate and the prescribed rate is treated as a taxable fringe benefit.
Employers are responsible for calculating the taxable benefit, deducting the relevant tax and remitting it to KRA within the required timelines.
For deemed interest, KRA directed employers and other affected taxpayers to deduct 15 per cent withholding tax and remit the amount to the Commissioner within five working days.
How Fringe Benefit Tax is calculated
Fringe Benefit Tax applies when an employer extends a loan to an employee on terms that are more favourable than market conditions.
For example, if an employee receives an interest-free loan, the entire 8 per cent prescribed interest is treated as a taxable employment benefit. Where the employer charges interest below 8 per cent, only the difference between the actual rate and the prescribed rate becomes taxable.
The tax liability falls on the employer, who is required to account for and pay the Fringe Benefit Tax to KRA.
Low interest benefit rules remain in force
KRA also retained the low interest benefit rate at 8 per cent for the six-month period ending in December 2026.
The provision applies where employees receive subsidised loans from their employers at rates lower than the prescribed benchmark.
The authority publishes these rates every quarter to ensure employers apply the correct tax treatment when calculating benefits arising from staff loan arrangements.
KRA urges compliance
KRA advised employers and taxpayers to apply the new rates when preparing payroll and tax returns for the applicable periods.
The authority also reminded taxpayers that it will not be held responsible for payments that are not successfully received or remitted within the prescribed timelines.
The new rates are expected to guide employers in assessing taxable employee benefits and ensuring compliance with Kenya’s Income Tax Act throughout the remainder of 2026.
