Running a small or medium-sized business in Kenya means choosing the right tax regime. The two most common options are Turnover Tax (TOT) and Income Tax. Both apply under the Kenya Revenue Authority (KRA), but they work very differently. Picking the right one can save you money, reduce stress, and keep your business compliant.
1. Turnover Tax (TOT) – Simple but strict
Turnover Tax is a flat 1% tax on your gross monthly sales. It applies if your business earns between KES 1 million and KES 25 million annually.
- Deadline: File and pay by the 20th of the following month.
- Penalty for late filing: KES 1,000 per month.
- Penalty for late payment: 5% of the tax due plus interest at 1% per month.
Who qualifies?
- Small traders, boutiques, salons, barbershops, restaurants, online shops, workshops.
Who does not qualify?
- Professionals (lawyers, doctors, accountants, consultants).
- Rental income earners.
- Businesses already subject to withholding tax.
Example: If your shop makes KES 500,000 in sales in July, you pay KES 5,000 as TOT by 20th August.
Pros: Simple filing, predictable tax.
Cons: You pay tax even when making a loss.
2. Income Tax
Income Tax applies to all businesses and professionals. You calculate it on your profit (income minus expenses).
- Rates:
- Individuals/sole proprietors: Graduated bands (10% to 35%).
- Companies: 30% (residents) or 37.5% (non-residents).
- Deadline: File and pay by 30th June of the following year.
- Penalties:
- Late filing: The higher of 5% of tax due or KES 2,000 (individuals) / KES 20,000 (companies).
- Late payment: 5% of the unpaid tax plus 1% monthly interest.
Who pays Income Tax?
- Professionals (lawyers, consultants, doctors).
- Medium to large businesses.
- Companies.
Example: A consultancy earns KES 500,000 but spends KES 300,000 on expenses. You pay tax on KES 200,000 profit, not the full turnover.
Pros: Fair for high-expense businesses, allows deductions.
Cons: Requires accounting records and more compliance work.
3. TOT vs Income Tax – Which fits your business?
| Factor | Turnover Tax (TOT) | Income Tax |
|---|---|---|
| Tax Base | Gross sales | Net profit |
| Rate | 1% flat | 10–35% (individuals), 30% (companies) |
| Filing | Monthly by 20th | Annually by 30th June |
| Record Keeping | Minimal | Detailed financial records |
| Best For | Small traders, retail, service businesses with low costs | Professionals, manufacturers, medium to large businesses |
| Risk | Pay tax even on losses | Heavy compliance and higher rates if margins are high |
4. Advice for SMEs
- If you run a retail shop, salon, or restaurant → TOT keeps things simple.
- If you offer professional services or run a business with high costs → Income Tax works better.
- If your turnover grows above KES 25 million → KRA requires you to move to Income Tax.
Both TOT and Income Tax carry strict deadlines and penalties for non-compliance. Choosing the right one depends on your sector, expenses, and growth plans. Don’t wait until penalties pile up – compliance is always cheaper than fines.
At Eliacc, we help SMEs register under the right tax obligation, file returns on time, and avoid penalties while focusing on growth.
Next step: Book a consultation with Eliacc today and get clarity on your business taxes.
