The transition from NHIF to the Social Health Insurance Fund (SHIF) introduced a significant shift in how Kenyan businesses process payroll. Unlike the old tiered NHIF system, SHIF calculations are strictly percentage-based, meaning they scale directly with an employee's total earnings.

If you are processing payroll in 2026, here is the definitive guide on how to calculate SHIF deductions legally and accurately to ensure KRA and SHA compliance.

The SHIF Calculation Formula

The SHIF deduction is calculated at a flat rate of 2.75% of an employee’s Gross Pay. There is no minimum contribution and no upper maximum cap.

Formula: Gross Pay × 2.75% = SHIF Deduction

What counts as "Gross Pay"?

This is where many employers make mistakes. For SHIF purposes, Gross Pay is not just the basic salary. It includes:

• Basic Salary
• Cash Allowances (House, Transport, Airtime, etc.)
• Commissions and Bonuses
• Overtime Pay

Step-by-Step Example

Let's say your employee, Jane, earns a Basic Salary of KES 50,000 and receives a House Allowance of KES 15,000.

1. Calculate Gross Pay: 50,000 + 15,000 = KES 65,000
2. Apply SHIF Rate: 65,000 × 2.75% (0.0275)
3. Total Deduction: KES 1,787.50

You will deduct KES 1,787.50 from Jane's salary and remit it to the Social Health Authority (SHA) by the 9th of the following month.

The Hidden Benefit: Insurance Relief

While SHIF takes a larger percentage of gross pay than the old NHIF, employers must remember to apply Insurance Relief when calculating PAYE. Employees are entitled to a 15% tax relief on their SHIF contributions.

In Jane's case, her SHIF deduction of KES 1,787.50 qualifies for an Insurance Relief of KES 268.13 (15%), which directly reduces her final PAYE tax burden.