Turnover Tax vs Corporation Tax: Which Regime Should Your Business Be In?

Turnover tax is sold to Kenyan small businesses as the merciful option. One rate, 1.5%, charged on sales. No expense schedules, no depreciation, no accountant explaining why the tax bill exceeds the money in the account. Compared with a 30% corporation tax return and its instalment calendar, it looks like a favour.

For some businesses it is. A salon turning over KES 8 million on a 20% margin pays KES 120,000 under turnover tax against KES 480,000 as a company. That is not a rounding difference; it is a car.

For others it is a quiet disaster. A hardware distributor turning over KES 20 million on a 3% margin pays KES 300,000 under turnover tax on a profit of KES 600,000. That is an effective tax rate of 50% on the money the business actually made, against KES 180,000 in the normal regime. Same tax, same country, same year, and the difference between the two outcomes has nothing to do with how much either business sold.

It has to do with margin. Turnover tax is charged on gross sales and takes no view on whether you made money, so the thinner your margin, the harder it bites. That single mechanic decides the regime question, and it is calculable in one line. This guide runs it both ways, covers the exclusion that disqualifies most consultants before they even reach the arithmetic, and explains how to leave the regime if you are in the wrong one.

Key Insight: The regime choice is driven by net margin, not revenue. Turnover tax taxes sales; corporation tax taxes profit. For a limited company the two cost exactly the same at a 5% net margin, because 1.5% of turnover equals 30% of profit at precisely that point. Below 5%, turnover tax is the more expensive regime, and it gets worse the thinner you run. The high-turnover, low-margin trader who signed up for turnover tax because it sounded simple is the classic casualty, and the eligibility band, being written in revenue, points them straight at it.

Part 1: The Two Regimes, Side by Side

Positions per KRA as at August 2026. Rates and thresholds are Finance Act sensitive; confirm on KRA before acting.

The two design philosophies are visible in the first row and everything else follows from it. Turnover tax buys simplicity by refusing to look at your costs. That refusal is a gift when your costs are low relative to sales, and a penalty when they are high.

Part 2: Who Is Actually Eligible

The rules are narrower than the marketing suggests.

The band. Turnover tax applies to a resident person whose gross or expected turnover is more than KES 1,000,000 but does not exceed KES 25,000,000 in any year of income. Cross the upper limit and you move into the normal regime; sit below the lower one and turnover tax does not apply to you either.

The rate and its date. 1.5% of gross sales, effective 1 July 2023 under the Finance Act 2023. This figure is worth being firm about, because a great deal of Kenyan tax commentary online still quotes 3%. That was the earlier position and it is stale. KRA states 1.5%, and KRA is the authority that assesses you.

Companies are included. A common misreading is that turnover tax is only for informal traders and sole proprietors. KRA's position is that it applies to any resident person or corporate within the band, so a limited company turning over KES 12 million can be on turnover tax. Incorporation does not decide the regime; the numbers do.

Non-residents are out. Turnover tax is a resident regime.

Four categories of income are excluded entirely, regardless of your turnover:

1. Rental income. Taxed under its own regime, covered in rental income in Kenya.
2. Management, professional or training fees. The big one. See Part 3.
3. Income already subject to a final withholding tax, such as qualifying dividends and qualifying interest.
4. Income of a person who is not resident.

You can elect out. A person may elect, by notice in writing to the Commissioner, not to be taxable under turnover tax, in which case the ordinary provisions of the Income Tax Act apply. This matters: being inside the band does not sentence you to the regime. If the arithmetic in Part 4 says the normal regime is cheaper, the exit is a letter.

Part 3: The Exclusion That Catches Consultants

This deserves its own section because it is the most consequential misunderstanding in the whole topic.

Management, professional and training fees are excluded from turnover tax. Not taxed at a different rate under it. Excluded from the regime.

The practical effect is that the entire class of Kenyan freelancers and small consultancies who assume turnover tax is their cheap, simple option cannot use it on their fee income at all. A marketing consultant billing KES 3 million a year, a trainer running corporate workshops, an engineer on retainer, an IT contractor: all sit squarely inside the KES 1 million to 25 million band, and none of them can put that income under turnover tax.

What applies instead is the ordinary regime: graduated rates on net profit, with expenses deductible, and with the 5% withholding tax that clients deduct from professional fees acting as an advance against the final bill rather than a settlement of it. That mechanism, including the filing-day shock when the withheld amount turns out to be far less than the liability, is worked in full in PAYE, withholding, and freelance tax.

Two consequences worth stating plainly. First, if you are a consultant who has been filing turnover tax on fee income, you are in the wrong regime and should speak to a tax agent rather than a blog. Second, the exclusion is not entirely bad news: the normal regime lets you deduct the laptop, the transport, the subscriptions and the home-office share, and a consultant's costs are frequently 30% or more of billings. Turnover tax would have allowed none of it.

Mixed businesses need care. A firm that sells goods and bills consultancy has income of two kinds, and the consultancy half is outside the regime. This is precisely the situation to take to a professional rather than resolve from a table.

Part 4: The Arithmetic

Here is the whole decision in one line. For a limited company, the two regimes cost the same when:

$$0.015 \times \text{Turnover} = 0.30 \times \text{Net profit}$$

Divide through by turnover, and net profit over turnover is just net margin:

$$\text{Break-even net margin} = \frac{0.015}{0.30} = 5\%$$

Above a 5% net margin, turnover tax is cheaper. Below it, turnover tax is more expensive. That is the rule, and it does not depend on how big the business is.

Now watch it work at both ends.

The Thin-Margin Trader: Turnover Tax Punishes

A hardware and building-materials distributor. High volume, tight pricing, a competitive market.

The effective rate on the money this business actually made is:

$$\frac{300{,}000}{600{,}000} = 50\%$$

Fifty per cent, against a headline of one and a half. The distributor is paying a fifth of the year's entire profit for the privilege of a simpler return. And the eligibility band is what led them here: at KES 20 million of turnover they look like exactly the business turnover tax was designed for, right up until anybody looks at the margin.

The Fat-Margin Retailer: Turnover Tax Rewards

A salon and beauty-products retailer. Lower volume, much better margin.

Effective rate on actual profit: 120,000 divided by 1,600,000, or 7.5%. This business should be on turnover tax and should have been from the start.

Two businesses, one regime, opposite verdicts, and the only variable that mattered was the margin.

Part 5: The Sole Proprietor Version

The 5% line is a company rule. An unincorporated business, a sole proprietor or a partner, is taxed at the graduated individual rates on business profit, and those rates are gentler at the bottom because of the lower bands and personal relief.

The current annual bands, effective 1 July 2023:

Personal relief is KES 2,400 a month, or KES 28,800 a year, credited against the tax computed.

Take the same salon, unincorporated: turnover KES 8,000,000, profit KES 1,600,000.

Against turnover tax of KES 120,000, the sole proprietor saves KES 268,600 by being on the regime. Still the right answer at a 20% margin.

But the crossover sits in a different place. Note what the first two rows of that table actually do: tax on the first KES 288,000 is KES 28,800, and personal relief is KES 28,800, so the two cancel exactly and the first KES 288,000 of profit is effectively untaxed. The graduated regime shelters the bottom of the profit range in a way corporation tax, which charges 30% from the first shilling, does not. Solving for the profit at which graduated tax equals the KES 120,000 turnover tax bill on KES 8 million of sales gives a profit of about KES 705,000, which is a net margin of roughly 8.8%.

So for this sole trader the break-even is not 5% but nearer 9%, and unlike the company rule it moves with turnover: the larger the sales base, the larger the turnover tax bill that the graduated bands must climb to match, and the higher the crossover margin. The practical guidance for an unincorporated business is therefore not a rule of thumb but an instruction: compute both figures on last year's actual numbers before choosing.

Part 6: The Two Traps the Arithmetic Misses

Even a business comfortably above the break-even margin should check two things the average-year calculation hides.

The Loss Year

Turnover tax is charged on sales. If the year goes badly and the business loses money, the tax is still payable, and there is no relief and nothing to carry forward. In the normal regime a loss year produces no tax at all, and the loss is carried forward to shelter future profits.

For a business with steady, predictable trading this is theoretical. For anything cyclical, seasonal, tender-dependent or exposed to a single large customer, it is not. A contractor who has a strong year followed by a year with no awards pays turnover tax on whatever they billed in the bad year and gets no credit for the loss. Volatility argues for the normal regime even at margins where turnover tax looks cheaper on average, and the businesses most exposed to it are the ones described in the contractor cash flow stack and seasonal working capital for agribusiness.

Growing Through the Ceiling

The band is KES 25,000,000, and it is tested on expected turnover as well as actual. A business growing at 30% a year that turns over KES 21 million this year should be planning its exit from the regime now, not discovering it in the following January.

The transition is not merely administrative. The normal regime requires proper books, an income statement and balance sheet, and quarterly instalment tax. A business that has spent three years keeping only daily sales and purchase records because turnover tax was all that required does not have the accounting history to produce a credible first return, and, more expensively, does not have the financial statements a bank will lend against. That is the same trap described in from registration to first facility: the records you keep for tax are the records you borrow against, and building them takes a year you cannot compress.

The practical rule: start keeping full books at KES 18 to 20 million of turnover, whatever regime you are in.

Part 7: What Turnover Tax Does Not Exempt You From

Being on turnover tax settles one tax. It settles no others, and this is a genuinely common and expensive misunderstanding.

• VAT is a separate and independent decision. If your taxable supplies reach KES 5 million in any rolling twelve months, you must register for VAT and account for it monthly, whether or not you are on turnover tax. Since the turnover tax band starts at KES 1 million and the VAT threshold is KES 5 million, a very large share of turnover tax payers are also VAT-registered. The mechanics, and the reason VAT is a working-capital event rather than a compliance chore, are in VAT for Kenyan SMEs.
• eTIMS still applies. The electronic invoicing obligation is not waived by the regime, and the records it produces are what supports both your customers' input VAT claims and your own bankability. See eTIMS and the SME.
• PAYE still applies if you have employees, along with SHIF, NSSF and the housing levy. Payroll is untouched by your income tax regime.
• Withholding tax still applies to the payments you make where the law requires it.
• Records are still required. Turnover tax reduces the record-keeping burden to daily gross sales and daily purchases; it does not remove it, and KRA can ask.

Part 8: The Compliance Rhythm, Compared

The regimes feel different month to month, and for many owners this is what actually decides it.

Instalment tax in the normal regime is not required where the tax payable for the year is KES 40,000 or less, and each instalment is calculated as the lower of 110% of the previous year's liability or an estimate of the current year's. Agricultural businesses follow a different pattern, paying 75% and 25% rather than four equal instalments.

Two honest observations. Turnover tax genuinely is simpler, and for an owner-operator without a bookkeeper that simplicity has real value that the arithmetic in Part 4 does not price. But it is a monthly obligation, twelve payment dates a year against four, and the KES 1,000 monthly penalty for missed returns accumulates quietly on a business that files sporadically.

Part 9: How to Change Regime

If the arithmetic says you are in the wrong one, moving is a letter, not a battle.

To leave turnover tax: elect in writing to the Commissioner not to be taxed under it. The ordinary provisions of the Income Tax Act then apply to you. Do this deliberately and with a date, not by simply filing a different return.

To enter it: you must be within the band and your income must not fall into the excluded categories. Register the obligation on iTax.

Three things to do before either move:

1. Compute both figures on last year's actual numbers, not on a projection. If you cannot produce a reliable net profit figure, that itself is information: you may not be ready for the normal regime yet.
2. Check the trend, not the year. If margin is falling as you scale, the regime that suits you today may not suit you next year, and turnover tax gets worse exactly as growth makes the decision harder to reverse cleanly.
3. Take a mixed-income or borderline case to a registered tax agent. The cost of one consultation is trivial next to a wrong regime running for three years.

Decision Framework: Four Questions

1. Is my income even eligible? Between KES 1 million and 25 million, resident, and not rental income, professional or management fees, or income under a final withholding tax. If you bill professional fees, stop here; the regime is not open to you on that income.
2. What is my actual net margin, from last year's real numbers? Above 5% as a company, turnover tax is cheaper. Below it, the normal regime is. If unincorporated, compute both rather than using the rule.
3. How volatile is my trading? Turnover tax charges you in a loss year. If a bad year is realistic, weight the normal regime more heavily than the average-margin arithmetic suggests.
4. Where will I be in two years? If growth takes you past KES 25 million, start building full books now, because the accounts you will need for tax are the accounts you will need for a facility.

Risk Factors

Choosing on revenue instead of margin. The eligibility band is written in revenue, which quietly encourages exactly the wrong test. Margin decides it.

The loss year. No relief, no carry-forward, tax still due.

Assuming turnover tax covers everything. VAT, PAYE, eTIMS and withholding obligations are unaffected by the regime.

The consultant misfiling. Professional, management and training fees are excluded. Filing turnover tax on fee income is a wrong regime, not a cheap one.

Growth through the ceiling without books. Discovering at KES 26 million that you have no financial statements is both a tax problem and a borrowing problem.

Citing stale rates. A large amount of Kenyan tax content still quotes 3%. The rate has been 1.5% since 1 July 2023, per Finance Act 2023 and per KRA.

Annual change. Every Finance Act touches this area. The rate has already moved twice. Date every figure and re-check before acting.

Bengula View

The turnover tax regime is a genuinely good piece of policy aimed at a real problem: the compliance burden on small businesses that cannot afford an accountant. Where it fits, it fits well, and the salon in Part 4 saving KES 360,000 a year is not an edge case.

The trouble is that it is chosen the way most tax decisions in Kenya are chosen, which is by whichever option was explained most simply at the moment of registration. Nobody at that counter asks about margin, because at registration there is no margin yet. So the trader with KES 20 million of sales and 3% on the bottom line signs up for the simple option and then pays half of every year's profit to it, and because the tax is final and the returns are monthly and small, nobody ever sits down and totals what it cost.

The fix is an hour with last year's numbers. Take turnover, take net profit, divide the second by the first, and compare it to 5% if you are a company or run both computations if you are not. That single calculation is worth more than any amount of reading about the regime, and it should be repeated every year, because the number that decides it is the one number in your business that moves.

For the wider picture, this decision sits alongside two others that are frequently and wrongly bundled with it: VAT registration, which is independent and driven by who your customers are, and whether to incorporate at all, which is driven by liability, funding and succession before it is driven by tax. Answer them separately.

Sources and Further Reading

• Bengula Inc: Tax, Compliance, and Cash in Kenya, the hub covering the full filing calendar, the penalty table across every tax head, and what the whole stack actually costs.
• Kenya Revenue Authority: Turnover Tax for the rate, the eligibility band, the exclusion list, the election to opt out, filing dates and penalties.
• Kenya Revenue Authority for corporation tax, individual bands, instalment tax and current thresholds.
• Kenya Law for the Income Tax Act, the Finance Act 2023 and the Tax Procedures Act.
• PwC Worldwide Tax Summaries: Kenya for a maintained summary of corporate and individual rates and the instalment tax calendar.

Rates and thresholds cited are as at August 2026: turnover tax 1.5% of gross sales effective 1 July 2023 (Finance Act 2023), band above KES 1,000,000 and not exceeding KES 25,000,000; corporation tax 30%; individual bands effective 1 July 2023 with personal relief of KES 2,400 per month. All figures are Finance Act sensitive. This guide is educational and is not a substitute for advice from a registered tax agent. Confirm every figure with KRA, and take mixed-income or borderline cases to a professional before electing into or out of a regime.