PUBLIC NOTICES 15/08/2023 Affordable Housing Levy (AHL)

The Kenya Revenue Authority (KRA) Public Notice of August 15, 2023, provided crucial clarifications on the computation of the Affordable Housing Levy (AHL) under the Finance Act, 2023. This levy, initially set at 1.5% of gross monthly salary for employees and a matching employer contribution, faced significant legal challenges, leading to its declaration as unconstitutional by the High Court in November 2023. Subsequently, the government enacted the Affordable Housing Act, 2024, which re-introduced the levy with an expanded scope to include non-salaried individuals and introduced tax relief. While the new Act has since been upheld by the High Court in October 2024, its constitutionality remains under review by the Court of Appeal, creating a dynamic and evolving legal landscape for employers and individuals in Kenya.

On August 15, 2023, the Kenya Revenue Authority (KRA) issued a public notice aimed at clarifying the scope and computation of the Affordable Housing Levy (AHL), which had been introduced through the Finance Act, 2023. This notice, building upon earlier directives from the Ministry of Lands, Public Works, Housing and Urban Development and the KRA itself, sought to provide much-needed guidance to employers and employees regarding their obligations under the then-newly implemented levy. The AHL, a cornerstone of the government's housing agenda, mandated contributions from both employers and employees to fund the national affordable housing program.

However, the journey of the AHL has been marked by significant legal contention and legislative evolution. What began as a straightforward directive for collection quickly escalated into a complex legal battle, challenging the very foundation of the levy's constitutionality. This article delves into the initial KRA clarifications, traces the pivotal judicial pronouncements that declared the initial levy unconstitutional, and examines the legislative response culminating in the Affordable Housing Act, 2024, and its ongoing legal scrutiny, providing a comprehensive overview for legal practitioners navigating this intricate regulatory environment.

The Affordable Housing Levy was initially introduced in Kenya through the Finance Act, 2023, with an effective date of July 1, 2023. This legislative amendment inserted new sections into the Employment Act, 2007, mandating that every employee and their employer each contribute 1.5% of the employee's gross monthly salary towards the levy. The primary objective was to generate revenue for the national affordable housing program, addressing Kenya's significant housing deficit.

Following the enactment of the Finance Act, 2023, the Ministry of Lands, Public Works, Housing and Urban Development, through a public notice dated August 3, 2023, formally appointed the Kenya Revenue Authority (KRA) as the collecting agent for the AHL. The KRA subsequently issued its own notice on August 4, 2023, outlining the remittance procedures, including declaring the AHL under sheet 'M' of the PAYE return on iTax and generating a separate payment slip. The KRA's further clarification on August 15, 2023, specifically defined "gross monthly salary" for AHL purposes to include basic salary and regular cash allowances such as housing, travel, and car allowances, while explicitly excluding non-cash benefits and irregular payments like bonuses, gratuities, and severance pay. Employers were also informed that their contribution to the AHL was an allowable deduction under Section 15 of the Income Tax Act (Cap. 470), with a penalty of 2% per month for late remittances..

The initial implementation of the AHL under the Finance Act, 2023, was swiftly met with legal challenges. On November 28, 2023, a three-judge bench of the High Court of Kenya, in *Okiya Omtata Okoiti and 51 others vs Cabinet Secretary for National Treasury Planning and 6 others, Constitutional Petition No. E181 of 2023*, declared several provisions of the Finance Act, 2023, including those relating to the AHL, unconstitutional. The court found that the levy lacked a comprehensive legal framework, violated principles of public participation, and was discriminatory by targeting only individuals in formal employment without justification. While the High Court initially granted a temporary stay of its decision until January 10, 2024, to allow the government to appeal, the Court of Appeal, on January 26, 2024, declined to issue further stay orders, effectively upholding the High Court's suspension and rendering the collection of the levy without legal basis from January 2024.

In response to these judicial setbacks, the government moved to re-legislate the levy. The Affordable Housing Bill, 2023, was subsequently passed by Parliament and assented to by the President on March 19, 2024, becoming the Affordable Housing Act, 2024 (Act No. 2 of 2024). This new Act sought to address the constitutional deficiencies highlighted by the High Court. It expanded the scope of the levy to include individuals not in formal employment but earning income, who are now also required to contribute 1.5% of their gross income, alongside the existing 1.5% employee and employer contributions. The Act also introduced an affordable housing relief, allowing resident individuals who pay the levy to claim a 15% relief, capped at KES 9,000 per month or KES 108,000 per annum, effective March 19, 2024. Furthermore, the penalty for late remittance was revised to 3% per month.

Despite the legislative rectification, the Affordable Housing Act, 2024, has also faced renewed legal challenges. However, in a significant development on October 22, 2024, a three-judge bench of the High Court (Justices Olga Sewe, John Chigiti, and Josephine Mong'are) ruled that the Affordable Housing Act and the levy were constitutionally enacted, finding sufficient public participation and dismissing claims of double taxation and discrimination. This ruling effectively preserved the levy and the program. Nevertheless, appeals against this decision were consolidated and heard by a five-judge bench of the Court of Appeal on January 19, 2026, with the judgment currently reserved. Until the Court of Appeal delivers its judgment, the deduction and remittance obligations under the Affordable Housing Act, 2024, remain in force. Recent applications seeking conservatory orders to halt the collection of the levy pending the determination of its constitutionality have also been dismissed by the High Court, indicating a judicial inclination against interim suspensions.

The legal trajectory of Kenya's Affordable Housing Levy has been a dynamic and closely watched saga, transitioning from initial implementation under the Finance Act, 2023, through a declaration of unconstitutionality, to its re-establishment under the Affordable Housing Act, 2024. The KRA's August 15, 2023, public notice, while providing initial clarity on 'gross monthly salary,' has been superseded by a series of profound judicial and legislative actions that have reshaped the levy's framework.

For legal practitioners, the current landscape necessitates a thorough understanding of the Affordable Housing Act, 2024, and the ongoing appellate proceedings. Employers must continue to deduct and remit the AHL at 1.5% for both employees and themselves, calculated on the expanded definition of gross income, and be aware of the 3% monthly penalty for non-compliance. Individuals, including those in the informal sector, must understand their contribution obligations and the available tax relief. The pending judgment from the Court of Appeal in January 2026 remains a critical watch point, as it will ultimately determine the long-term constitutional validity and operational future of the Affordable Housing Levy in Kenya. Practitioners should advise clients to stay abreast of these developments and ensure strict compliance with the prevailing legal requirements.