End-of-service gratuity and the tax-free portion.
Gratuity payable
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Tax-free portion
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Chargeable
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Tax on chargeable
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What gratuity actually is in Kenya, and when it is owed
Gratuity, often called service pay, is a lump sum an employer pays when you leave after a stretch of continuous service. It is not automatic for everyone. Where you already belong to a registered pension or provident scheme that the employer contributes to, the law generally treats that scheme as your service pay, so a separate gratuity may not arise. Gratuity tends to show up in contracts, collective bargaining agreements, and in the Employment Act provisions that cover staff who are not in a registered scheme. This tool is built for the common case: an employee on a monthly basic salary who has a contractual accrual rate and wants to see both the gross figure and the slice the taxman can reach.
The shape of the calculation is simple and stable. You take monthly basic pay, multiply by a daily accrual rate expressed as days per year, divide by 30 to turn it into a daily figure, then multiply by years of service. Many Kenyan contracts settle on 21 days a year, which is roughly three weeks of pay for every year worked, but you can set any rate your contract specifies. The figure the tool produces is the gross gratuity before any tax question is asked.
The exemption that decides your tax bill
Here is the part that trips people up. Gratuity or service pay paid into a registered scheme is tax-free up to a generous yearly allowance for each year you served. The allowance this calculator applies is KES 240,000 for every year of service, which is the figure introduced by recent Finance Act changes. So someone with eight years of service carries an exemption of KES 1.92 million before any tax is due. Because most accrual rates produce less than a full month of basic per year worked, a large share of ordinary gratuities fall entirely inside the exemption and attract no tax at all.
When the gross gratuity does exceed the exemption, only the excess is chargeable, and this tool taxes that excess on the graduated lump-sum withdrawal bands rather than your normal monthly PAYE table. Those bands, as modelled here, run 10 percent on the first KES 400,000, 15 percent on the next KES 400,000, then 20, 25 and 30 percent on successive slabs. Treat every one of these numbers as the figure the calculator uses, not as certified current law. Kenya has reworked retirement and gratuity taxation more than once recently, so confirm the exemption and the bands with the Kenya Revenue Authority or a payroll specialist before you rely on a number for a real settlement.
A senior exit that does trigger tax
Take a manager on KES 400,000 basic pay, leaving after 3 years on a 30-day accrual. The gross gratuity is one month of basic for each year, so KES 1.2 million. The exemption is KES 240,000 times 3 years, which is KES 720,000, leaving KES 480,000 chargeable. On the lump-sum bands the calculator applies, the first KES 400,000 is taxed at 10 percent and the remaining KES 80,000 at 15 percent. These steps use the rates this calculator applies.
| Step | Amount (KES) |
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That KES 52,000 is a touch over 4 percent of the headline payout, because the exemption protected the bulk of it and the lowest band did most of the rest. The chart shows how the KES 1.2 million splits three ways.
A common mistake worth avoiding
Do not assume the tax comes out on your usual PAYE rate. An employer can sometimes choose to spread a gratuity back over the years it relates to and run it through PAYE, which can land you in lower monthly bands and produce a different bill from the lump-sum-band figure shown here. Which method applies depends on how the payment is structured and on KRA practice at the time. If the sum is large, ask your payroll team in writing which basis they will use before you sign the exit paperwork, because it changes your net.
Does a redundancy or severance payment count as gratuity?
Not exactly. Statutory redundancy pay, payment in lieu of notice, and accrued leave are separate items with their own tax treatment, and they are not the same as a contractual service-pay accrual. This tool models the accrual-based gratuity only. If your exit package bundles several of these together, calculate the gratuity portion here and treat the rest line by line.
Is gratuity paid in cash treated the same as gratuity paid into a scheme?
The exemption is most clearly available when the money goes into a registered pension or provident scheme. Gratuity paid directly to you in cash can be chargeable in full, depending on the rules in force and how the scheme is set up. Because this is one of the areas Kenya has been changing, do not bank on the cash route being tax-free. Confirm the current position with KRA and structure the payment accordingly.