Finance Act 2025 Explained: What Kenyan SMEs Must Prepare for in 2026

The Finance Act 2025 introduced several changes affecting Kenyan SMEs, including updates to tax compliance, VAT, income tax, eTIMS integration, and KRA reporting obligations. As SMEs prepare for the 2026 financial year, understanding these changes is critical for compliance, cash flow management, and strategic planning.

Overview of the Finance Act 2025

Quick Advisory:
The Finance Act 2025 updated tax rates, reporting requirements, and compliance obligations for SMEs. Businesses must review expense validation, eTIMS compliance, and payroll systems to avoid penalties.

The Finance Act 2025 covers:

Corporate tax updates
VAT and eTIMS compliance
PAYE and payroll adjustments
Small business relief and exemptions
Digital record-keeping mandates

Adamjee Advisory Insight:
Adamjee Auditors helps SMEs align accounting processes with Finance Act 2025 updates. Leveraging our Tax Compliance Advisory ensures your business remains audit-ready and minimizes disputes with KRA.

Key Changes SMEs Must Note

Quick Advisory:
SMEs need to prepare for changes in VAT, income tax, and digital compliance. Non-compliance could result in disallowed expenses, penalties, or delayed refunds.

Area	2025 Update	SME Implication
VAT & eTIMS	Mandatory real-time invoice reporting	Ensure all suppliers are eTIMS compliant; non-compliant expenses disallowed
Corporate Tax	Adjusted thresholds for small businesses	SMEs may qualify for relief if under limits
PAYE	Automated deduction enhancements	Payroll systems must integrate with KRA APP
Digital Record-Keeping	Mandatory for audit and compliance	Proper bookkeeping essential for exemptions or audits
Relief Measures	Tax incentives for SMEs under defined turnover	Opportunity to optimize cash flow legally

Adamjee Advisory Insight:
The KRA Automated Payment Plan (APP) allows SMEs facing temporary cash flow issues to defer taxes, but proactive eTIMS and bookkeeping compliance remains essential. For support, see our Payroll Services and Bookkeeping Services.

Impact on Expense Validation and eTIMS

Quick Advisory:
All tax-deductible expenses must be supported by eTIMS invoices. Missing or invalid invoices will be disallowed under KRA rules in 2026.

Key considerations for SMEs:

Verify that suppliers issue valid eTIMS invoices
Ensure accounting systems automatically capture invoice validation
Reconcile all payments with eTIMS records

Adamjee Advisory Insight:
Adamjee Auditors integrates expense tracking with eTIMS compliance through our CFO Advisory Services, helping SMEs avoid disallowed expenses and maintain financial clarity.

PAYE and Payroll Changes for SMEs

Quick Advisory:
Payroll systems must comply with updated PAYE reporting and KRA APP rules. Mistakes can trigger penalties and interest charges.

SME payroll implications:

Mandatory digital submissions through KRA APP
Accurate computation of employee tax reliefs
Timely remittance to avoid late penalties

Adamjee Advisory Insight:
Our Payroll Services ensure SMEs integrate Finance Act 2025 changes into payroll seamlessly, maintaining compliance and protecting staff welfare.

Small Business Relief Provisions

Quick Advisory:
Certain SMEs qualify for tax relief under Finance Act 2025. Eligibility depends on turnover, assets, and employee count.

Highlights:

Relief Type	Eligibility	Benefit
Reduced corporate tax	SMEs with turnover ≤ KES 5M	Lower tax liability
Investment incentives	SMEs investing in ICT or machinery	Tax deductions for qualifying expenditure
KRA APP deferrals	SMEs with cash flow constraints	Deferred tax payments under approved plan

Adamjee Advisory Insight:
Adamjee Auditors guides SMEs in leveraging tax relief provisions while maintaining full compliance with KRA and IFRS standards. Learn more via our Tax Compliance Advisory service.

Accounting and Bookkeeping Requirements

Quick Advisory:
Digital record-keeping and accurate bookkeeping are mandatory. SMEs must align accounting processes with KRA and IFRS reporting standards.

Use eTIMS-integrated accounting software
Maintain detailed expense records, including invoices and receipts
Ensure reconciliation of bank accounts and supplier payments

Adamjee Advisory Insight:
Adamjee Auditors’ Bookkeeping Services help SMEs maintain proper financial records, making statutory audits or exemption applications straightforward.

Statutory Audit and Compliance Considerations

Quick Advisory:
Finance Act 2025 interacts with statutory audit thresholds. SMEs must determine if they require an audit or can apply for exemption.

Companies exceeding thresholds must conduct statutory audits
Exempt companies must maintain proper records for KRA and eTIMS validation
Pre-audit reviews minimize compliance risk

Adamjee Advisory Insight:
Our Audit and Assurance Services assist SMEs in preparing for audits or confirming exemption eligibility, aligning with Finance Act 2025 and KRA expectations.

Sector-Specific SME Challenges

Quick Advisory:
Different industries face unique challenges under Finance Act 2025. SMEs in manufacturing, logistics, and hospitality need to align suppliers, payroll, and eTIMS compliance carefully.

Sector	Key Challenge	Recommended Action
Manufacturing	Supplier invoices may be non-eTIMS compliant	Verify supplier registration and invoice validation
Logistics	Fuel and transport VAT compliance	Implement eTIMS reconciliations
Hospitality	High volume of small suppliers	Consolidate procurement and digitalize invoicing

Adamjee Advisory Insight:
Through our Training Webinars, we educate SME management teams on sector-specific compliance strategies, ensuring smooth implementation of Finance Act 2025 updates.

Leveraging Adamjee Auditors for SME Compliance

Quick Advisory:
Professional guidance ensures SMEs comply efficiently. Adamjee Auditors provides end-to-end advisory for tax, payroll, bookkeeping, and statutory audit readiness.

Our services include:

Tax Compliance Advisory – Align SMEs with Finance Act 2025 updates
Bookkeeping Services – Accurate records for audit or exemption
Payroll Services – Automated PAYE and KRA APP compliance
CFO Advisory Services – Strategic financial planning
Audit and Assurance Services – Pre-audit and statutory audit readiness

Adamjee Advisory Insight:
By integrating Finance Act 2025 updates with international best practices from SFAI, SMEs gain compliance confidence and strategic financial insights.

Action Plan for SMEs in 2026

Quick Advisory:
Preparation is critical. SMEs must review tax obligations, eTIMS integration, payroll, bookkeeping, and statutory audit needs before the new financial year.

Steps:

Map expenses and supplier eTIMS compliance
Update payroll systems per PAYE changes
Review statutory audit thresholds and exemption eligibility
Automate accounting and reporting to KRA standards
Engage professional advisory services for ongoing compliance

Adamjee Advisory Insight:
Our CFO Advisory Services help SMEs implement proactive compliance strategies, minimizing penalties and maximizing financial efficiency.

Conclusion

Finance Act 2025 introduces significant changes affecting SMEs in Kenya. eTIMS compliance, tax relief eligibility, payroll integration, and bookkeeping standards are critical areas to address. Proactive preparation, supported by professional advisory services, ensures SMEs remain compliant, minimize tax liability, and strengthen financial management.

Gain Clarity and Confidence in Your Finances

Navigate the complexities of compliance, tax, and financial management with a trusted partner. Adamjee Auditors, a member of Santa Fe Associates International (SFAI), provides world-class audit, tax, and advisory services to help your business achieve its goals.

Schedule a consultation with our expert team in Nairobi or Mombasa to discuss your business needs.

Nairobi Office Park View Heights, Mombasa Road, OR Mbandu Complex, Langata Road
+254 717 908 241
madamjee@adamjeeauditors.co.ke

Mombasa Office Suite 401, Motorwalla Building, Jomo Kenyatta Road
+254 750 053 053
info@adamjeeauditors.co.ke
https://adamjeeauditors.com/