Small businesses in Kenya with sales between KES 1,000,000 and KES 25,000,000 a year fall under turnover tax (TOT) by default. It is simple, but it is not always the cheapest option. This guide shows how to compare. It is general information, not tax advice.

The two systems

Turnover tax is 1.5% of gross sales, paid monthly on iTax. It is a final tax: you cannot deduct any expenses, and it is due even if the business made a loss.

Income tax is charged on profit - sales minus allowable business expenses - filed once a year. A sole trader pays at the same graduated rates as employees (10% up to 35%), after personal relief. A company pays corporation tax of 30% on its profit.

The rule of thumb

  • Low profit margins (for example a shop selling goods bought for resale)
  • income tax is usually cheaper, because TOT taxes sales you mostly spent.
  • High profit margins (for example consulting or services with few costs)
  • turnover tax is usually cheaper.

Worked examples

A sole trader with sales of KES 3,000,000 a year pays turnover tax of KES 45,000, whatever the profit.

Under income tax, what they pay depends on the profit:

  • Profit of KES 300,000 (a 10% margin): roughly KES 3,000 after personal relief. Much less than TOT.
  • Profit of KES 600,000 (a 20% margin): roughly KES 88,600 after personal relief. More than TOT.

These use the individual income tax bands and personal relief, and ignore other income. If you also have a salary, business profit is taxed on top of it at your highest rate, which makes TOT relatively more attractive.

Work out your own figures with the turnover tax calculator and salary calculator.

Choosing income tax instead

A business that qualifies for TOT can elect to be taxed under the ordinary income tax rules instead, by notifying KRA. You then:

  • keep proper books of sales and expenses,
  • support expenses with eTIMS invoices - see eTIMS explained,
  • file an annual return, and pay instalment tax where it applies.

Take advice before switching: the cheaper system on paper is only cheaper if you keep the records to back it up.

VAT

Neither system replaces VAT. Businesses with sales over KES 8,000,000 a year must register for VAT; check with KRA how VAT registration affects your turnover tax position. See the VAT calculator.

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