State exempts retirees gratuity payments from taxation

President William Ruto signs a document at State House, Nairobi, April 17, 2025. /PCS

The Cabinet has resolved to exempt gratuity payments owed to retirees from taxation in a key policy move it says is aimed at enhancing dignity for senior citizens.

Currently, gratuity payments are subject to taxation.

The decision to remove the tax was reached during ministerial deliberations chaired by President William Ruto at State House, Nairobi, Tuesday.

"Retirees will benefit significantly as all gratuity payments, whether in public or private pension schemes, will now be fully tax-exempt, ensuring dignity for Kenya’s senior citizens after retirement," a Cabinet dispatch from State House said.

Gratuity payments, also known as service gratuity or severance pay, are typically lump-sum payments made to employees upon termination of employment or upon retirement.

The payments are intended to compensate the employee for their years of service.

Save for the National Social Security Fund (NSSF), the payments are not a mandated requirement under Kenyan law but rather a provision often outlined in employment contracts or collective bargaining agreements.

In some cases, gratuity may be paid to the employee's legal representatives if the employee dies while in service.

The despatch said the policy measure is contained in the Finance Bill, 2025, which the Cabinet approved during the meeting.

The Bill focuses primarily on closing loopholes and enhancing efficiency, including addressing loopholes related to tax expenditures that have historically been exploited to siphon funds from public coffers, such as through inflated tax refund claims.

The despatch said the Bill seeks to minimise tax-raising measures and instead aims to enhance tax administration efficiency through a new legislative framework.

It said key provisions include streamlining tax refund processes, sealing legal gaps that delay revenue collection, and reducing tax disputes by amending the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act.

"Employers will also be required to automatically apply all eligible tax reliefs and exemptions when calculating Pay As You Earn (PAYE) taxes for employees. Currently, many employers omit these reliefs, forcing employees to seek refunds from the Kenya Revenue Authority," the Cabinet said.

It said the reforms, which also include implementation of significant budget realignments in line with the government’s policy of fiscal consolidation and commitment to living within its means, underpins the Bottom-Up Economic Transformation Agenda (BETA) and reinforce government’s commitment to building a stronger and more inclusive economy.