Designing a more progressive PAYE system to support Rwanda's low-income workers

Summary

Personal income tax plays an important role in Rwanda’s tax system, accounting for around 22% of total tax revenues, of which Pay-As-You-Earn (PAYE) makes up around 90%. Beyond revenues, PAYE design matters for fairness, redistribution, job creation, and the decisions that people make around work — making reforms both politically salient and economically significant.

Between 2019 and 2023, the Ministry of Finance and Economic Planning (MINECOFIN) and the Rwanda Revenue Authority (RRA) conducted an in-depth review of PAYE thresholds, with the aim of alleviating the tax burden on low-income formal sector workers. TaxDev collaborated with government analysts to assess policy options and ensure that revenue, equity, and efficiency trade-offs were clearly understood. 

The reforms, set out in Rwanda’s 2021–2024 Medium-Term Revenue Strategy, and approved by Parliament in 2023 and phased in during 2023–2024, uprated tax thresholds in line with inflation and increased progressivity by extending the tax-free threshold and introducing a new 10% tax band. Around 136,000 PAYE taxpayers (or 21%) were relieved of paying PAYE entirely, while a further 108,000 (17%) earning under USD 100 per month saw average tax rates fall by up to 10%.

The policy challenge

When collaborative work began in 2019, Rwanda's PAYE thresholds had not been updated since 2005. Over that period, wages rose in cash terms, but tax thresholds had not kept pace, meaning that lower-paid workers ended up paying an increasing proportion of their income in tax — raising concerns about equity and the tax system's contribution to poverty reduction. 

Any successful reform needed to balance several priorities and constraints. Increasing the thresholds to address the equity concern would reduce revenues, while introducing an additional, higher rate might impact Rwanda's ability to attract skilled workers and investment, and to develop a knowledge-based economy. With only around 21% of the workforce in formal employment in 2019, PAYE reform would also have implications not just for current taxpayers but also for businesses and workers’ incentives to formalise and pay tax in future.

The impact

Senior officials at MINECOFIN requested that the tax policy team review the PAYE rate structure and develop a series of reform options. TaxDev provided training, coaching, and technical support, including on the use of taxpayer-level data and the analysis, costing, and evaluation of policy options.

The analytical work drew on administrative PAYE data held by RRA and an existing IMF-built simulation model, which was adapted and extended with TaxDev support. This was complemented by household survey data to assess potential indirect effects, such as increased consumption among low-income households. TaxDev provided on-the-job support for data cleaning, modelling, and costing, and supported qualitative assessments of risks around compliance, marginal incentives to work, and labour force formalisation.

Working iteratively with the government team, TaxDev helped appraise a series of policy options, model alternatives such as income tax credits, draft policy briefs, and present findings to the Tax Policy Committee and senior officials. The iterative modelling process enabled revenue and distributional trade-offs to be quantified and discussed transparently, allowing policymakers to engage meaningfully with sometimes competing policy objectives.

The final reforms were approved by Parliament and implemented in a phased manner during 2023–2024 to manage the potential fiscal costs. Around 136,000 workers were relieved of paying PAYE entirely, and a further 108,000 low-income earners saw meaningful reductions in their average tax rates — delivering tangible benefits while preserving the overall revenue base.

Lessons and next steps

Several lessons emerge from this experience:

• Close collaboration between Ministries of Finance and Revenue Authorities improves policy design. Regular technical engagement and shared data between MINECOFIN and RRA were critical to effective analysis and the development of realistic policy options.
• Presenting multiple, clearly costed options supports better decision-making. A range of reform scenarios enabled senior policymakers to engage meaningfully with equity, revenue, and efficiency trade-offs.
• Rigorous, principles-based qualitative analysis enriches the appraisal process. Where quantitative estimation is not possible, structured qualitative assessment of potential distributional, economic, and behavioural impacts can complement quantitative analysis and ensures important considerations are not overlooked.
• High-quality administrative and survey data significantly expands the range of questions that can be addressed. Investment in data access and analytical capacity pays dividends across multiple reform processes.

Going forward, ongoing monitoring of revenue and labour market outcomes using administrative PAYE data will inform future threshold adjustments.