The Cabinet has approved the exemption of gratuity payments from taxation. The decision was made during a ministerial session chaired by President William Ruto at State House, Nairobi, on Tuesday.
Gratuity payments commonly known as service gratuity or severance pay are lump-sum amounts paid to employees upon retirement or termination of employment. Though not mandatory under Kenyan law (except through the National Social Security Fund), these payments are often included in employment contracts or collective bargaining agreements. In the event of an employee’s death, gratuity may be paid to their legal representatives.
Until now, gratuity payments have been subjected to taxation, reducing the final amount received by retirees. The latest exemption, which applies to both public and private pension schemes, will ensure retirees receive their full entitlements tax-free.
A dispatch from State House noted that the measure is contained in the Finance Bill, 2025, which was approved during the Cabinet meeting. “Retirees will benefit significantly… ensuring dignity for Kenya’s senior citizens after retirement,” the statement read.
Beyond the gratuity exemption, the Finance Bill 2025 focuses on enhancing tax administration and reducing tax-related disputes. It introduces reforms aimed at sealing legal loopholes exploited through inflated tax refund claims and delays in revenue collection. It also proposes amendments to major tax statutes, including the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act.
Additionally, employers will be required to automatically apply all eligible tax reliefs and exemptions when calculating Pay As You Earn (PAYE) for employees—a move that is expected to reduce the burden on workers who often seek tax refunds from the Kenya Revenue Authority (KRA) due to employer omissions.
The policy reforms align with the government’s broader fiscal consolidation agenda under the Bottom-Up Economic Transformation Agenda (BETA), which seeks to ensure prudent spending and build a stronger, inclusive economy. This exemption for retirees reflects the administration’s commitment to supporting the elderly and promoting social equity.
