Uganda is set to implement significant adjustments to its Pay-As-You-Earn (PAYE) tax regime, commencing July 1, 2026, as part of the 2026/2027 National Budget. The Income Tax (Amendment) Act 2026 introduces a revised tax-free threshold and a new middle-income tax band, aiming to boost disposable income and address income inequality, though concerns linger regarding its impact on national competitiveness and revenue generation.
The cornerstone of the amendments is the upward revision of the monthly PAYE tax-free threshold to 335,000 shillings, equivalent to 4 million shillings annually. This increase from the current 235,000 shillings monthly threshold is expected to exempt a marginal number of lower earners from PAYE altogether and provide modest savings for those already within the tax bracket. Trevor Lukanga, Associate Director at PwC Uganda, notes that this adjustment means all PAYE-paying employees will contribute slightly less tax overall, leading to a marginal increase in take-home pay. He posits that these measures, while seemingly counterintuitive at a time of urgent revenue needs, are driven by a government effort to stimulate consumption, reduce income inequality, and alleviate poverty, aligning with public demands for social equity over pure revenue mobilisation. “The proposals provide targeted relief to lower- and middle-income earners at a time when many households are struggling,” Lukanga stated.
A notable addition to the tax structure is the introduction of a middle-income band. Earnings between 410,000 and 485,000 shillings per month will now be taxed at 25 percent. This represents a reduction from the previous 30 percent rate applied to this income segment, offering tangible relief to middle-income earners.
However, the Institute of Certified Public Accountancy (ICPAU) has expressed reservations, suggesting that the new 335,000 shilling threshold remains insufficient to significantly impact disposable income and the broader economy. The ICPAU also voiced discomfort with the sustained 40 percent income tax rate for individuals earning above 120 million shillings annually. The institute argues that this high rate for the top earners hinders their ability to save and invest in local entrepreneurship, potentially impacting economic activity. Furthermore, the ICPAU warns that elevated tax rates and lower income thresholds for higher tax bands could diminish Uganda’s attractiveness as a hub for regional headquarters and major projects, thereby affecting its regional competitiveness.
The Uganda Manufacturers Association (UMA) has also opposed the amendment, citing concerns that it could inadvertently increase the tax burden on certain workers. UMA Member John Jet Tusabe advocated for either the elimination or reduction of the 40 percent rate to 35 percent, arguing that existing PAYE rates already place undue pressure on workers. Tusabe highlighted that high tax rates contribute to difficulties in attracting and retaining talent in Uganda. The UMA further proposed raising the PAYE threshold to 500,000 shillings per month, citing the escalating cost of living and warning that excessive taxation could compromise tax compliance and ultimately undermine revenue collection.
A hypothetical calculation for an individual earning 1.9 million shillings per month illustrates the impact of the new PAYE structure. After deducting the 5 percent NSSF contribution (95,000 shillings), the progressive tax brackets would apply. The first 335,000 shillings remain tax-free. Earnings from 335,001 to 410,000 shillings are taxed at 10 percent, yielding 7,500 shillings. The income from 410,001 to 1,900,000 shillings is taxed at 20 percent, resulting in 298,000 shillings. The total monthly PAYE tax amounts to 305,500 shillings. Consequently, the net pay, after subtracting PAYE and NSSF, is 1,499,500 shillings. This represents an improvement from the current net pay of 1,330,000 shillings for the same gross income, excluding other potential deductions like Local Service Tax.
Lukanga suggests that to fully realise the benefits of these tax reforms and ensure taxpayer value, the government must concurrently strengthen social services. This, he argues, will allow the broader economy to benefit from a healthier and more productive populace.
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