Kenya just exempted gratuity from income tax. What changed?

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The Finance Act, 2025 amended the Income Tax Act to exempt gratuity payments earned from July 1, 2025 from income tax. This means gratuity accrued after that date is tax free under the new rules.

KRA has clarified that any gratuity that relates to service earned before July 1, 2025 remains taxable even if the payment is made after that date. In other words, the exemption is not retroactive. Employers must therefore split gratuity payments between the pre- and post-July 1, 2025 periods when computing tax.

The amendment extends the exemption to gratuity from both public and private schemes. Earlier changes had already given public officers some relief under prior amendments. Employers should review how these rules apply to their payroll and pension arrangements.

KRA guidance also explains how taxable amounts tied to earlier periods should be treated for tax purposes, including spreading the tax liability across relevant prior years where applicable. Employers must follow these rules when calculating withholding and reporting.

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Quick summary for HR and payroll teams

• Effective date: gratuity earned on or after 1 July 2025 is exempt from income tax.
• Any gratuity attributable to service before 1 July 2025 remains taxable and must be computed under the old rules.
• Employers must split payments into taxable and tax-free portions and show correct payroll accounting and withholding.
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What this means for employees

Employees who retire or leave after July 1, 2025 will keep the portion of their gratuity that was earned after that date. This increases take-home retirement pay for new retirees and long serving employees who earn gratuity after the effective date.

If an employee’s gratuity relates mostly to years worked before July 1, 2025, a significant portion may still be taxable. Employees should speak to HR or a tax advisor to understand their personal position.

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What payroll and HR teams must do now

1. Update payroll rules and software to split gratuity payments into pre- and post-July 1, 2025 portions. Ensure the computation logic is auditable. ‍
2. Review contract wording and pension scheme treatments to confirm whether any payments are channeled into registered pension schemes and how that affects tax treatment.
3. Update payroll checklists and employee communications so retirees receive clear statements showing taxable and tax-free portions. Document calculations for compliance.
4. Train payroll and HR staff on the new guidance and audit processes. Keep records in case of KRA queries.

Simple example (illustrative)

Suppose total gratuity on retirement is KES 1,200,000. If KES 900,000 relates to service before July 1, 2025 and KES 300,000 relates to service after that date, then KES 900,000 remains taxable under the old rules and KES 300,000 is tax free. This is an illustrative breakdown. Companies must compute using actual service-period records.
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Answer engine friendly FAQ (short answers)

Is gratuity now tax free in Kenya?
Gratuity earned from July 1, 2025 is exempt from income tax.

Does the exemption apply to gratuity earned before July 1, 2025?
No. Gratuity attributable to service before July 1, 2025 is still taxable even if the payment is made later.

Do public officers get the same benefit?
Guidance indicates public sector rules changed earlier and public officers may already have related exemptions. Employers should confirm treatment for public sector staff. ‍

How should employers calculate withholding?
Employers must split gratuity into pre- and post-exemption portions, apply the relevant tax treatment to each and keep detailed records as required under KRA guidance.

Should employees delay retirement to benefit from the exemption?
Tax is one factor in retirement timing. Employees should weigh tax benefits against health, personal plans and career goals. Employers should not give financial advice but can provide illustrative payroll calculations.

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What Workpay recommends

Workpay can help payroll and HR teams implement the correct split, update payroll logic and generate transparent employee statements. We can also run scenario modelling to show employees and leadership how different retirement dates affect net payouts. If you want, we can audit your current gratuity calculations and provide an implementation plan for payroll systems and HR communications.

Contact us to schedule a gratuity impact review and payroll update. Include “Gratuity Review” in your message and we will prioritize the audit.

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