Retirees to receive tax-free gratuity in major policy shift
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.
Retired workers will now take home their full gratuity benefits after the Cabinet approved a plan to exempt the payments from taxation.
This move marks a major shift in how Kenya handles retirement compensation and is expected to boost financial stability for senior citizens.
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The exemption covers both public and private pension schemes, according to a Cabinet meeting held at State House and chaired by President William Ruto on 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," reads a cabinet despatch.
Gratuity payments, also known as service gratuity or severance pay, are lump-sum amounts given to employees after retirement or job termination.
These payments are usually meant to recognise years of service and are either included in employment contracts or set out in agreements between workers and employers. In the event of a worker's death before retirement, the gratuity may be passed on to their legal representatives.
While such payments have not been compulsory under Kenyan law, except through the National Social Security Fund (NSSF), many employers have used them to reward long-serving workers. However, until now, these payments were subject to taxation, reducing the final amount retirees received.
The decision to make gratuity tax-free is part of a broader policy framework embedded in the Finance Bill, 2025, which the Cabinet endorsed during the same meeting. The Bill introduces reforms aimed at tightening how taxes are collected and closing existing loopholes that have led to the misuse of public funds.
Tax loopholes
The Cabinet explained that the Finance Bill is focused on improving tax collection processes while reducing the need for additional taxes.
It highlights loopholes in tax expenditures that have previously been used to siphon funds through inflated tax refund claims.
Key reforms proposed in the Bill include new rules to streamline tax refund procedures, address legal delays in revenue collection, and amend laws such as the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act.
One major change involves employers being required to factor in all tax reliefs and exemptions when calculating Pay As You Earn (PAYE) taxes.
“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," reads the despatch.
These measures, the Cabinet said, are in line with the government’s broader fiscal policy, which aims to cut unnecessary spending and strengthen economic inclusion. The reforms also align with the Bottom-Up Economic Transformation Agenda (BETA), the government’s main economic blueprint.
The Cabinet emphasised that the policy changes were not just about managing money better but about creating fairness in how citizens are treated, especially those who have served the country for decades and are now in retirement.
The government hopes the tax exemption on gratuity will encourage more Kenyans to plan for retirement, while also offering immediate relief to those already retired and waiting to receive their benefits.
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