Uganda PAYE boost as parliament passes new tax law
Uganda’s Parliament has passed the Income Tax (Amendment) Bill, 2026, delivering a major boost to workers through changes in Pay As You Earn (PAYE) and reshaping the country’s tax system.
At the center of the new law is a significant PAYE reform. The tax free threshold has been raised from UGX 235,000 to UGX 335,000 per month, a move that removes many low income earners from taxation and increases take home pay for thousands of workers. The change corrects for years of inflation that had steadily reduced the real value of salaries.
For many Ugandans, this is the most immediate and visible impact of the law. Workers earning at the lower end of the income scale will now keep more of their earnings, while others will see a reduction in the amount deducted from their salaries each month. The adjustment is expected to improve household incomes and boost spending in the wider economy.
While PAYE takes the spotlight, the law also introduces broader reforms aimed at strengthening revenue collection and supporting growth. Parliament approved incentives to attract investment, particularly in tourism, where developers of hotels and tourism facilities will benefit from tax exemptions if they meet set conditions. The extension of tax relief for the Bujagali Hydropower Project is also intended to prevent increases in electricity tariffs, shielding consumers from higher energy costs.
At the same time, the government is moving to capture more revenue from emerging sectors. The law strengthens withholding taxes on digital services, telecommunications commissions, gaming and betting winnings, and payments to public entertainers. These changes aim to improve compliance and ensure that fast growing areas of the economy contribute fairly to national revenue.
Lawmakers, however, pushed back against some proposals seen as harmful. Parliament rejected plans to impose a 0.5 percent minimum tax on companies making losses and declined to tax income from the sale of non business assets. These decisions reflect concerns about fairness and the need to protect businesses and individuals from undue tax pressure.
The law also introduces measures to improve compliance and flexibility. Taxpayers can now opt to file rental income tax monthly, helping them better manage cash flow. Clearer definitions, including the classification of software as royalties, align Uganda’s tax system with international standards, while the arm’s length principle strengthens oversight of transactions between related entities.
In the financial sector, microfinance and Tier 4 institutions will now be allowed to claim deductions for bad debts, bringing them in line with other financial institutions and supporting access to credit in underserved communities.
The following are the updated Pay As You Earn (PAYE) income tax rates under Uganda’s Income Tax (Amendment) Bill, 2026, which determine how much tax is deducted from monthly salaries:
- UGX 0 – 335,000: 0% (no income tax)
- UGX 335,001 – 410,000: 10%
- UGX 410,001 – 10,000,000: 20% – 30% (progressive bands)
- Above UGX 10,000,000: 40%
With Parliament’s approval secured, the PAYE changes stand out as the defining feature of the reform, directly increasing earnings for workers while anchoring a wider set of tax adjustments. As the country awaits presidential assent, the new law signals a shift toward a more responsive tax system that balances revenue needs with the realities of everyday Ugandans.
