Ethiopia’s New Income Tax Law 2025: What It Means for Payroll and Salaries

Ethiopia has passed the Income Tax Amendment Proclamation No. 1395/2025, marking the biggest overhaul of personal income taxation in years. These changes affect how salaries are taxed, payroll is calculated, and compliance is managed for both employees and employers.

Whether you are a low-income worker, a mid-level employee, or a business owner, this reform has direct consequences on your take-home pay and on how payroll is processed.

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What Changed in Ethiopia’s Income Tax 2025

The law makes several major adjustments:

• The minimum taxable income is now 2,000 ETB per month, up from 600 ETB.
• The lowest tax rate has increased from 10% to 15%.
• The number of tax brackets has been reduced from seven to six.
• The top rate of 35% remains the same but now applies only to salaries above 14,000 ETB per month.
• A new Minimum Alternative Tax (MAT) has been introduced, requiring businesses and some self-employed individuals to pay at least 2.5% of annual turnover if their declared tax falls below that threshold.

Ethiopia’s New Income Tax Brackets (Effective July 2025)

This table replaces the older system that taxed anyone earning above 600 ETB per month and had more fragmented bands.

Who Benefits and Who Pays More Under the New Rules?

• Low-income workers (below 2,000 ETB): Now completely tax-free.
• Employees between 600 ETB and 2,000 ETB: Used to pay income tax, now fully exempt.
• Middle-income earners (2,001 – 14,000 ETB): Some will see higher deductions due to the 15% starting rate, while others benefit from the wider tax-free threshold.
• High earners (above 14,000 ETB): Still taxed at 35% but with more buffer before reaching the top rate.

The Minimum Alternative Tax (MAT) in Ethiopia

One of the most significant changes is the Minimum Alternative Tax (MAT).

• Taxpayers with business income, rental income, or digital side income may be required to pay at least 2.5% of annual turnover if their calculated tax liability is lower.
• This rule is designed to improve compliance and broaden the tax base, especially in sectors like self-employment and digital content creation.

What Employers and HR Managers Need to Do

• Update payroll systems to apply the new income tax brackets.
• Check payslips to ensure correct deductions are being made.
• Educate employees on how the changes affect net pay.
• Review side income policies to ensure compliance with the Minimum Alternative Tax.

Why These Payroll Changes Matter

This reform is not just about taxation. It reflects Ethiopia’s broader economic strategy to balance:

• Reducing the tax burden on low-income workers
• Increasing compliance from business owners and freelancers
• Simplifying payroll processes with fewer brackets
• Supporting government revenue in the face of high inflation

With inflation projected to reach nearly 25% in mid-2025, every birr counts. Understanding the payroll changes can help businesses and employees plan better.

Stay Compliant with Ethiopia’s Payroll Changes

Payroll compliance is critical in Ethiopia’s evolving regulatory environment. With these new tax reforms, businesses must ensure they are fully aligned with the law to avoid penalties and build trust with employees.

At Workpay, we help organizations across Africa manage payroll, tax compliance, and statutory contributions with accuracy and efficiency. Our platform ensures you stay compliant, save time, and focus on growing your business.

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