The Kenya Revenue Authority (KRA) has announced new rates for Fringe Benefit Tax and deemed interest that will impact employers providing subsidized loans to their employees during the final quarter of 2025.
In a notice issued on Tuesday, October 21, the tax authority set the market interest rate at 8% for the three months of October, November, and December 2025, which will be used to calculate fringe benefit tax on employee loans.
The public notice outlines two key rates that employers must observe when providing loans to employees at below-market interest rates.
For Fringe Benefit Tax purposes, the market interest rate has been set at 8% and will apply throughout the last quarter of 2025. Additionally, the prescribed deemed interest rate has also been pegged at 8% for the same period.
According to the notice, employers must deduct withholding tax at a rate of 15% on the deemed interest and remit it to the Commissioner within five working days.
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Fringe Benefit Tax comes into play when employers extend loans to their employees, directors, or their relatives at interest rates below the prevailing market rate. This preferential lending is considered an employment benefit and attracts taxation.
The tax is calculated based on the gap between the market interest rate and the actual interest rate charged on the employee's loan. Employers, not employees, are responsible for paying this tax.
For instance, if an employee receives a loan of Ksh3,000,000 at 3% interest when the market rate is 9%, the fringe benefit would be calculated based on the 6% difference (deemed interest).
This tax obligation extends beyond active employment. If a loan remains outstanding even after an employee leaves the company, the employer is liable for the fringe benefit tax until the loan is fully repaid.
Section 12B of the Income Tax Act governs fringe benefit tax, which has been in effect since June 12, 1998. The provision applies to all loans given to employees, directors, or relatives at below-market rates.
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