Turnover Tax vs PAYE for Kenyan Freelancers 2026 — Which Costs Less?

The Two Tax Options for Kenyan Freelancers and Self-Employed Individuals

If you earn income outside regular employment in Kenya — as a freelancer, consultant, sole trader, or online worker — you have two main tax regimes to consider:

• Turnover Tax (TOT): A simplified 3% tax on business revenue (turnover), not profit. For businesses with annual turnover between KES 500,000 and KES 5 million.
• Regular Income Tax (PAYE rates): Progressive rates from 10% to 35%, applied to your net profit after business expenses.

The right choice depends almost entirely on your profit margin. Here is the full comparison.

How Turnover Tax (TOT) Works

TOT is designed to be simple. Key features:

• Rate: 3% of gross business receipts (revenue) — not profit
• Eligible: Annual business turnover between KES 500,000 and KES 5,000,000
• Filing: Quarterly returns via iTax (April 20, July 20, October 20, January 20)
• No deductions: You cannot deduct expenses — the 3% applies to all revenue
• Simple: No complex accounting or profit calculation required

How Regular Income Tax Works for Self-Employed

If you opt out of TOT or earn above KES 5 million, you pay income tax using the same progressive PAYE bands as employed workers:

• 10% on the first KES 288,000 per year (KES 24,000/month)
• 25% on the next KES 100,000 per year
• 30% on KES 388,001 to KES 6,000,000 per year
• 32.5% on KES 6,000,001 to KES 9,600,000
• 35% above KES 9,600,000

Crucially: you pay on net profit (revenue minus allowable business expenses). Your genuine business expenses — equipment, software, office rent, professional development, internet — are all deductible before applying the tax rate.

The Critical Decision: Margin Determines the Winner

The break-even point between TOT and regular income tax depends on your profit margin (profit as % of revenue):

Profit Margin	Regular Tax Effective Rate	TOT	Better Option
90% (consultant, minimal costs)	~22–27% on profit = 20–24% on revenue	3% of revenue	TOT wins easily
50% (typical service business)	~15–20% on profit = 7.5–10% on revenue	3% of revenue	TOT still wins
20% (thin margins, high costs)	~10% on profit = ~2% on revenue	3% of revenue	Regular income tax wins
10% (very high costs)	~10% on profit = ~1% on revenue	3% of revenue	Regular income tax wins clearly

Real Examples: KES 1,000,000 Annual Revenue

Example A: Freelance Graphic Designer (75% profit margin)

Revenue: KES 1,000,000 | Expenses: KES 250,000 | Profit: KES 750,000

• TOT: KES 1,000,000 × 3% = KES 30,000
• Regular income tax on KES 750,000 profit: approximately KES 138,400 minus personal relief KES 28,800 = KES 109,600
• TOT saves this freelancer approximately KES 79,600 per year

Example B: Hardware Distributor (15% profit margin)

Revenue: KES 1,000,000 | Expenses: KES 850,000 | Profit: KES 150,000

• TOT: KES 1,000,000 × 3% = KES 30,000
• Regular income tax on KES 150,000 profit: approximately KES 15,000 minus personal relief = ~KES 0 (below threshold)
• Regular income tax saves this business KES 30,000 per year

Who Should Use Turnover Tax?

TOT is typically better for:

• Consultants, lawyers, accountants, doctors — high margin service providers
• Freelancers (designers, writers, developers, marketers) with minimal material costs
• Online service workers (remote workers, content creators)
• Any business with profit margins above 30–40%

Who Should Use Regular Income Tax?

Regular income tax is better for:

• Traders and distributors with high input costs (materials, inventory)
• Businesses with significant deductible expenses
• Early-stage businesses making losses (losses can be carried forward)
• Anyone earning below KES 500,000 per year (below TOT threshold)
• Anyone earning above KES 5,000,000 per year (above TOT ceiling)

Do You Need to Register for VAT?

If your annual turnover exceeds KES 5,000,000, VAT registration becomes mandatory (16% on taxable supplies). You also exit TOT eligibility and must use regular income tax. Below KES 5 million, VAT is optional — you can register voluntarily if you want to claim input VAT.

Practical Steps: How to Register for TOT

1. Log into itax.kra.go.ke with your KRA PIN
2. Navigate to Registration → Business Registration
3. Select "Turnover Tax" as your tax obligation
4. Declare your estimated annual turnover
5. File quarterly returns by the 20th of the month after each quarter ends
6. Pay via M-Pesa Paybill 572572 (account: your KRA PIN)

Related Tools & Guides on payecalculator.co.ke

• register for TOT
• PAYE calculator

Frequently Asked Questions

Can I switch between TOT and regular income tax?

Yes — you can opt out of TOT and apply regular income tax rates if it is more beneficial. Notify KRA via iTax. However, you cannot switch back and forth opportunistically — KRA expects consistent treatment.

Does TOT apply to employed people with a side business?

Yes. If you have both a PAYE salary and a side business, your salary is taxed via PAYE by your employer. Your additional business income is eligible for TOT if your business revenue is between KES 500,000 and KES 5 million per year. Declare both on your annual iTax return.