Kenya: Income tax exemption for certain gratuity and pension payments

Employer Action Code: Act

The Finance Act 2025 introduces some taxpayer-friendly measures. Among other things, the act exempts certain employer-paid gratuity benefits and withdrawals from registered pension accounts from personal income tax; establishes a requirement for employers to automatically apply tax deductions, allowances and exemptions under the Income Tax Act (ITA) as part of their payroll withholding; and increases the tax-free per diem allowance for travel expenses.

Key details

• The portion of a gratuity benefit paid to an employee at retirement, if any, that is related to service on or after July 1, 2025, is no longer subject to personal income tax, aligning the tax treatment of gratuities in the private sector with changes to such payments in the public sector at the end of 2024
• The tax treatment of pre-July 2025 gratuity benefit accruals remains unchanged (e.g., tax-exempt if the benefit is paid into a registered pension fund, subject to applicable tax limits and provided the employee did not claim tax deductions for the contributions for the year concerned). Tax liability can continue to be spread over the five prior years
• Withdrawals from a registered pension fund, provident fund, individual retirement fund, public pension plan or the National Social Security Fund are now tax-exempt for members who have reached the fund’s normal retirement age or have been members of the fund for at least 20 years — or in the case of early withdrawals due to ill health. Previously, withdrawals up to specified annual limits were tax-exempt
• Employers are now required to process all applicable tax deductions, allowances and exemptions under the ITA on behalf of their employees to reduce the administrative burden on individual income tax filings
• The maximum tax-free per diem allowance for employee expenses incurred while on official duty outside the workplace (e.g., for food, travel or entertainment) increased from 2,000 Kenyan shillings to 10,000 Kenyan shillings

Employer implications

For employers in Kenya, providing gratuity benefits payable at retirement (or at the end of employment for reasons other than retirement) is voluntary, unless a collective bargaining agreement calls for it. Over 60% of employers surveyed by WTW provided supplemental retirement benefits to their employees, typically through a defined contribution arrangement (in some cases with a guaranteed minimum return). Employers should consider the effect of the new tax exemption rules on their employees and the potential impact on the design of any gratuity or retirement benefit programs. Employers should work with their payroll providers to implement the new tax withholding rules.