When the new financial year begins on July 1, millions of Ugandan workers will technically pay less Pay-As-You-Earn (PAYE) tax.

The government says the changes, contained in the Income Tax (Amendment) Act 2026, are intended to leave more money in workers’ pockets, especially among low- and middle-income earners who have long complained about the rising cost of living.

But as the implementation date approaches, economists, employers and tax experts are divided over whether the reforms will deliver meaningful relief or merely amount to marginal adjustments that will be swallowed by inflation and everyday expenses.

At the centre of the debate is the increase in the monthly tax-free threshold from Shs235,000 to Shs335,000, the first revision of the PAYE structure in more than a decade.

The changes will also introduce a new middle-income tax band, reducing the tax rate on earnings between Shs410,000 and Shs485,000 from 30 percent to 25 percent.

For government, the reforms represent an attempt to modernise a tax structure that has remained largely unchanged since 2012 despite significant increases in living costs and wage levels.

For workers, however, the key question is much simpler: How much more money will actually remain in their pockets at the end of every month?

Long-awaited adjustment

The revision comes after years of criticism from labour groups, economists and businesses who argued that Uganda’s PAYE thresholds had become outdated.

When the tax-free threshold was increased from Shs130,000 to Shs235,000 in 2012, the cost of living was significantly lower than it is today.

Since then, prices of fuel, food, transport, rent, healthcare and education have risen steadily, eroding household purchasing power.

Tax experts say the failure to adjust tax bands over time effectively increased the tax burden on workers as salaries rose to match inflation.

The new threshold of Shs335,000 seeks to partially address that concern.

According to Trevor Lukanga, Associate Director at PwC Uganda, all employees currently paying PAYE stand to benefit because the first Shs335,000 of monthly income will now be tax-free.

“One thing is clear: if you currently pay PAYE, you stand to take home slightly more pay. It may not be a huge amount, but it is still some relief,” he says.

Lukanga argues that the reforms are designed to increase disposable income, stimulate consumption and reduce income inequality.

“The proposals provide targeted relief to lower- and middle-income earners at a time when many households are struggling,” he says.

How much difference will it make?

While government has presented the amendments as a significant intervention, some analysts argue that the gains for ordinary workers may be too small to be felt.

For an employee earning a gross monthly salary of Shs1.9 million, calculations based on the new tax structure show a modest increase in take-home pay.

Under the revised system, after accounting for PAYE and the mandatory five percent National Social Security Fund (NSSF) contribution, the employee would take home approximately Shs1.5 million.

Under the previous structure, the worker would have taken home about Shs1.33 million.

Although the figures suggest an improvement, economists caution that the actual impact varies depending on income levels and other deductions such as Local Service Tax.

More importantly, they question whether the savings will be enough to offset rising household expenses.

The Institute of Certified Public Accountants of Uganda (ICPAU) believes the reforms do not go far enough.

In its analysis of the amendments, the institute argues that the new tax-free threshold remains too low to generate meaningful increases in disposable income.

“This change does not go far enough to effectively impact disposable income,” ICPAU notes.

For many workers struggling with rent, school fees, transport costs and food prices, the institute argues, the additional savings may barely be noticeable.

Winners and losers

While lower- and middle-income earners are expected to benefit from the reforms, debate continues over the government’s decision to retain the 40 percent tax rate for the highest income bracket.

Individuals earning more than Shs120 million annually will continue to face the top marginal rate, a move government has defended as necessary to maintain tax progressivity.

However, ICPAU argues that the rate may discourage investment and entrepreneurship among high-income earners.

“The 40 percent income tax rate impedes the ability of the highest-earning category to save more and drive local entrepreneurship, which would enhance economic activity,” the institute says.

The accounting body also warns that Uganda risks becoming less attractive compared to neighbouring countries competing for regional headquarters, investors and skilled professionals.

Business leaders have raised similar concerns.

Employers push back

The Uganda Manufacturers Association (UMA), one of the country’s largest employer groups, opposed aspects of the reforms during consultations.

Manufacturers argued that Uganda already imposes relatively high PAYE rates on workers compared to regional competitors.

According to UMA member John Jet Tusabe, high taxation is making it increasingly difficult for companies to attract and retain skilled talent.

“Workers are already overtaxed. Attraction and retention of talent in Uganda is increasingly becoming difficult, partly due to the unfavourable PAYE tax rates,” he said.

UMA proposed increasing the tax-free threshold to Shs500,000 per month instead of Shs335,000.

The association argued that such a move would better reflect the current cost of living and provide more meaningful relief to workers.

Employers also urged government to reduce the highest PAYE rate from 40 percent to 35 percent.

Their argument is that excessive taxation can undermine compliance, encourage tax avoidance and ultimately reduce revenue collection.

Revenue versus relief

The PAYE reforms highlight a broader policy dilemma facing government.

On one hand, the state is under pressure to increase domestic revenue collection in order to finance infrastructure projects, social services and debt obligations.

On the other hand, households continue to face economic pressures that have increased calls for tax relief.

The government’s decision to reduce the burden on some workers appears to signal a shift towards balancing revenue mobilisation with social welfare considerations.

Lukanga says this approach reflects growing recognition that taxation policy should not be driven solely by revenue targets.

Instead, he argues, it should also support broader economic objectives such as reducing poverty and stimulating consumption.

When households have more disposable income, they spend more on goods and services, which can support business growth and job creation.

However, he warns that tax relief alone will not be enough.

To maximise the benefits, government must ensure taxpayers see tangible improvements in public services.

“Government must reinforce social services so taxpayers get value for the taxes they pay and so the broader economy can benefit from a healthier and more productive population,” he says.

What workers should expect

As the new financial year begins next week, most employees are unlikely to notice dramatic changes in their payslips.

The reforms will not transform household finances overnight, nor will they eliminate the pressures created by inflation and rising living costs.

What they will do is leave a little more money in workers’ pockets every month.

Whether that additional income translates into meaningful financial relief remains open to debate.

For government, the amendments represent a long-overdue correction to a tax system that had failed to keep pace with economic realities.

For workers, however, the true test will be felt not in tax tables or budget speeches, but in whether the extra money can meaningfully ease the burden of everyday life.