Uganda raises PAYE threshold as new income tax law takes effect

KAMPALA: Employees, telecom agents, entertainers, gamblers and businesses dealing in software licences are among those affected by a new income tax law that raises the PAYE tax-free threshold while introducing or expanding withholding taxes on several payments.

President Museveni assented to the Income Tax (Amendment) Act, 2026 on August 20, with the law taking effect retrospectively from July 1, according to the legislation. Parliament passed the Bill in April before it was returned to the House for reconsideration and subsequently passed again.

The biggest relief for salaried workers is an increase in the annual tax-free income threshold from Shs2.82 million to Shs4.02 million, equivalent to raising the monthly threshold from Shs235,000 to Shs335,000.

Under the new rates, income up to Shs4.02 million a year is not taxed. Income between Shs4.02 million and Shs4.92 million attracts a 20 per cent tax, while the new band between Shs4.92 million and Shs5.82 million is taxed at 25 per cent.

Income above Shs5.82 million and up to Shs120 million remains subject to a 30 per cent rate, while individuals earning more than Shs120 million annually face an additional 10 per cent on income above that threshold.

The changes mean employers have to review payroll calculations from July, as the Act specifies July 1 as its commencement date.

The law also reinstates a 15 per cent withholding tax on betting and gaming winnings. However, unlike a proposal that would have taxed the entire payout, the law defines winnings as the difference between the payout and the amount staked.

This means the tax is calculated on the punter’s net gain. Winnings paid by a person licensed to conduct a national lottery are excluded.

The tax on telecommunications commissions has also been expanded.

Telecommunications service providers are required to withhold 10 per cent of gross commissions paid for telecommunication retail services, mobile network services and mobile money services.

The measure broadens the previous scope, which mainly covered commissions paid to airtime and mobile money agents. The withholding is a final tax where the commission is paid to a resident individual.

Another new measure targets public entertainers.

A person paying a public entertainer must withhold six per cent of the gross payment. The definition covers people performing in public or before a camera or microphone for entertainment, artistic or related purposes.

The provision potentially captures performers across stage, radio, television and digital platforms, placing a new compliance obligation on event organisers, broadcasters, brands and other payers.

The law has also added software to the definition of a royalty.

This means payments for the use of, or right to use, software can fall under the royalty tax regime, particularly where payments are made to non-residents.

The amendment also provides that the tax regime for non-residents providing digital services does not apply to income attributable to royalties.

Businesses with software licensing, subscription and reseller arrangements may therefore have to review their contracts and tax treatment.

Another change introduces a statutory requirement for related companies to apply the arm’s length principle when conducting controlled transactions.

Under the new provision, transactions between associates must be accounted for in a manner consistent with the arm’s length principle, strengthening the legal basis for transfer pricing compliance.

The law also introduces a five per cent withholding tax on certain interest paid outside Uganda on debentures issued by resident companies.

In addition, hotel and tourism facility developers meeting specified investment, local sourcing and employment conditions can access an income tax exemption.

The qualifying investment must be at least $10 million for a foreign investor or $5 million for a citizen. The developer must also, subject to availability, use at least 70 per cent locally sourced raw materials and employ at least 70 per cent Ugandans, whose wages must account for at least 70 per cent of the total wage bill.

The income tax exemption for the Bujagali Hydropower Project has also been extended to June 30, 2032.

The Arab Bank for Economic Development in Africa and the Uganda Red Cross Society have been added to the list of institutions whose income is exempt from tax.

For landlords, the law allows an individual liable to rental tax to submit a provisional rental income return monthly, potentially giving taxpayers greater flexibility in managing their tax obligations.

Tax experts say the changes require businesses and employers to revisit their systems because several provisions apply from the beginning of the current financial year.

PwC Uganda has said the 2026 tax amendments are intended both to clarify aspects of tax law and boost government revenue, with the changes affecting businesses, employers and individual taxpayers.

The Uganda Revenue Authority has also highlighted changes relating to exemptions, infrastructure bonds and bad-debt deductions for microfinance institutions among the amendments.

Employers and businesses therefore face the immediate task of updating payroll and withholding systems, reviewing contracts and ensuring that taxes deducted since July are reconciled with the new law.