Late payment interest and its cap
How Kenyan late payment interest runs on unpaid tax, why it can never exceed the tax itself, and how it sits beside penalties and the 2026 amnesty.
By Achekam · · 5 min read · For Accountants & audit firms in Kenya
A client calls with a statement from iTax showing a balance far larger than the tax it remembers owing. Some of the difference is penalty. Most of it, on an old debt, is interest, and the client wants to know two things: how the figure was reached, and whether it will keep growing for ever.
The answer to the second question is no. Kenyan law puts a ceiling on late payment interest. Knowing how the interest runs, where the ceiling sits and what is charged on top lets the firm check KRA's figure, advise on what to pay first, and spot when an old arrear has stopped growing.
One per cent for each month or part of a month
The Tax Procedures Act, as published on Kenya Law, charges late payment interest at one per cent per month or part of a month on unpaid tax. Section 38 makes it simple interest: it is worked out on the unpaid tax only, never on interest already charged. The full text is in the Tax Procedures Act on Kenya Law.
KRA's own pages describe the same charge for each tax. For VAT and for income tax owed by companies and other non-individuals, KRA says late payment attracts a penalty of 5% of the tax due plus interest of 1% per month. KRA's page on turnover tax describes the interest more briefly, as 1% of the tax due; section 38 of the Act sets it at one per cent per month or part of a month, so go by the Act where the wording differs.
The words "or part of a month" matter. A payment that is a single day into a new month attracts a full month's interest for that month.
From the due date until the day it is paid
Interest starts on the date the tax was due, not the date KRA noticed, and runs until the tax is paid. Filing the return late does not move the due date for payment, and paying part of the tax stops interest only on the part paid.
A worked example in words. VAT for a month falls due on its normal date. The client pays it three months and a few days late. Interest is charged for three full months and for the part of the fourth month, so four months of interest at one per cent of the unpaid VAT. If the client had paid half of the VAT on time, interest would run only on the other half.
The cap: never more than the tax
The same section of the Tax Procedures Act says the accrued interest may not exceed the principal tax. Once the interest charged on a debt equals the unpaid tax itself, it stops growing.
This is the part clients rarely know. A turnover tax debt from several years back, never paid, may have reached the point where its interest equals the tax. From then on the balance does not grow through interest, although it is still owed in full. When checking a KRA statement, compare the interest on each old period with the tax for that period. Interest above the tax is a figure to question.
Penalties sit on top
Interest is not the only charge. Under the Act, the interest is charged in addition to any late payment penalty, and section 83A sets a late payment penalty of five percent of the tax due. The interest cap does not limit the penalty.
Late filing is a separate penalty again. KRA says:
| Tax | Late filing | Late payment |
|---|---|---|
| VAT | 5% of the tax due or KES 10,000, whichever is higher | 5% of the tax due plus 1% interest per month |
| Income tax, company or partnership | 5% of the tax due or KES 20,000, whichever is higher | 5% of the tax due plus 1% interest per month (non-individuals) |
| Turnover tax | 1,000 shillings per month | 5% of the tax due, plus interest |
These are the amounts KRA states at the time of writing. Check KRA's penalties pages before quoting them in a client letter, because Finance Acts change them.
Working a client's arrears
Achekam computes Kenyan corporation tax, instalment tax, VAT, withholding tax, turnover tax, capital gains tax and stamp duty once its rules are approved. Interest on arrears is not in that list, so keep the interest working in its own paper, period by period:
- List each unpaid period with its tax and due date.
- Count the months, and any part month, from due date to the expected payment date.
- Apply one per cent per month to the unpaid tax for that period.
- Cap the result at the tax for that period.
- Add the late payment penalty separately, uncapped.
- Compare the total with KRA's statement and list the differences.
Where KRA raises an assessment the client disputes, Achekam computes the objection and appeal deadlines from its approved administration rule and sets them to the end of the day in Nairobi time. Its filing calendar leaves out any deadline whose rule is still awaiting approval or contested, and says why, so the team knows which dates it must diary by hand.
Where the 2026 amnesty fits
KRA says the Finance Act 2026 tax amnesty covers penalties, interest and fines on liabilities due up to 31 December 2025, provided the outstanding principal tax is paid by 31 December 2026, subject to conditions. KRA is clear that the amnesty does not remove principal tax.
For a client with old arrears, that changes the order of payment. Paying the principal for periods up to the end of 2025 before the amnesty closes may remove the interest and penalties on them, while interest keeps running on anything left unpaid. Read the conditions on KRA's page before advising, and see the 2026 tax amnesty for the detail.
The advice to give
Tell the client plainly: interest grows each month or part month, never on itself, and never beyond the tax. Penalties are separate and are not capped in the same way. Old periods may qualify for the amnesty if the principal is paid in time. For the companion question on instalments, see the instalment underpayment penalty, and for VAT specifically, late VAT penalties.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
