Career advice · Updated October 2026

Service Pay and Gratuity in Kenya: Who Qualifies, How Much and How It Is Taxed

Few exit payments cause as many arguments as service pay and gratuity in Kenya. Employees often expect a lump sum for every year worked, while employers reply that NSSF contributions cancel it. Both are partly right. Section 35(5) and (6) of the Employment Act, 2007 create a statutory right to service pay and then take it away from most formal-sector workers, but contracts, collective agreements and wage orders can still give you gratuity on top. This guide sets out who qualifies, what the courts have said and how the money is now taxed.

Service pay, gratuity and severance are three different things

The words are used loosely on payslips and in HR letters, so it helps to separate them first:

Severance is not affected by NSSF membership. If your job ended through redundancy, read our redundancy guide instead, because the rules below do not reduce what section 40 requires.

What section 35(5) and (6) actually say

Section 35(5) says an employee whose contract is terminated under section 35(1)(c), which covers contracts paying wages monthly or at longer intervals, “shall be entitled to service pay for every year worked, the terms of which shall be fixed.” The Act does not fix a rate itself.

Section 35(6) then says the section does not apply where the employee is a member of any of these:

1. a registered pension or provident fund scheme under the Retirement Benefits Act;
2. a gratuity or service pay scheme established under a collective agreement;
3. any other employer scheme whose terms are more favourable than statutory service pay; or
4. the National Social Security Fund.

Because NSSF contributions are compulsory for almost every employee, item four is the one that usually decides the case. Our NSSF, SHIF and Housing Levy guide explains the contribution itself.

The NSSF exclusion in the courts

The Court of Appeal applied section 35(6)(d) directly in Kens Metal Limited v Shikanga [2022] KECA 561 (KLR). The trial court had awarded a long-serving worker KSh 208,998 in service pay, saying the employer had not proved he was an NSSF member. On appeal, the judges pointed to a December 2013 payslip showing a KSh 200 NSSF deduction and the worker’s own evidence that he was registered. The award was set aside.

The ELRC reached the same result in Mary Help The Sick Mission Hospital v Ngung’u [2025] KEELRC 1938 (KLR), overturning a KSh 173,250 service pay award because the employee’s payslips showed NSSF contributions.

The lesson for both sides is that evidence decides. In Kens Metal the worker won at trial precisely because the employer produced nothing on NSSF at first. If you were never registered, or deductions appear on your payslip but your NSSF statement shows nothing, raise it: unremitted deductions are a separate breach covered in our guide to salary deductions in Kenya.

When gratuity is still payable despite NSSF

Section 26(2) of the Act says that where a regulation, collective agreement, contract or court award gives better terms than Parts V and VI of the Act, the better terms apply. Section 35 sits in Part VI, so a more generous source overrides the NSSF exclusion.

The leading example is Wells Fargo Limited v Julius Ihomba Gatete [2018] KECA 755 (KLR). A security company employee of 16 years was awarded KSh 560,000 in gratuity under regulation 17 of the Regulation of Wages (Protective Security Services) Order, which gives eighteen days’ pay for every completed year of service after five years. The employer argued he was an NSSF member. The Court of Appeal upheld the award, holding that the order’s more favourable term applied through section 26(2). The same regulation, as quoted by the court, denies gratuity to a guard who is summarily dismissed for lawful cause or who leaves for any reason other than certified ill-health or retirement age.

In Kens Metal, the Court of Appeal also quoted its earlier view that section 35 “does not preclude parties from entering an agreement for retirement benefits or gratuity over and above the statutory NSSF arrangement.” In practice, gratuity in Kenya now comes mostly from three places:

• Fixed-term contracts, common at NGOs, development projects, county governments and state corporations, which often pay a percentage of basic salary at the end of each contract.
• CBAs in unionised sectors, which set a number of days’ pay per year of service.
• Sector wage orders, such as the protective security order above.

Reading a gratuity clause

Before you calculate anything, find the clause and check five points:

1. The base: basic salary only, or gross pay including allowances?
2. The rate: a percentage of the base, or a number of days’ pay per year?
3. Pro-rating: is gratuity earned monthly, or only if you complete the full contract?
4. Exit conditions: is it lost on resignation or summary dismissal?
5. Payment: paid to you in cash, or into a registered pension scheme?

A worked example with hypothetical terms: Achieng is on a two-year contract from January 2025 to December 2026 with a basic salary of KSh 80,000 and gratuity of 15% of basic salary, earned monthly. She earns KSh 12,000 of gratuity a month, or KSh 288,000 over the 24 months. Check your own figures against your contract, and use Business Radar’s gratuity calculator to test different rates.

How gratuity is taxed after the Finance Act 2025

The tax position changed recently. In a public notice dated 12 August 2025, KRA said the Finance Act 2025 amended the Income Tax Act to exempt gratuity earned after 1 July 2025. Gratuity earned before that date is still taxable, even when it is paid later:

• It is taxed as employment income in the year it was earned, spread back up to four years, with anything older treated as income of the fifth year.
• The employer adds each year’s share to your other pay for that year and charges the difference in PAYE.
• Gratuity for earlier periods paid into a registered pension scheme is not taxed, within the prescribed limits and only where you did not already claim pension relief for those years.
• Gratuity from a public pension scheme paid from the Consolidated Fund has been exempt since 27 December 2024.

In Achieng’s example, the KSh 72,000 earned from January to June 2025 is taxable as 2025 income, while the KSh 216,000 earned from July 2025 onwards falls under the exemption. Our PAYE calculator shows how much tax your regular pay already attracts.

How to claim service pay or gratuity

1. Collect your documents: contract, CBA if any, payslips, and your NSSF statement.
2. Work out which source applies: section 35(5) only if no exclusion applies; otherwise the contract, CBA or wage order.
3. Write to HR setting out the figure and the clause or section you rely on, and ask for a written breakdown of your final dues.
4. Escalate to the county labour officer, or file a claim at the Employment and Labour Relations Court. Section 89 generally requires a claim within three years.

Our terminal dues guide covers the other money owed when a job ends, and the terminal dues calculator adds up notice, leave and severance. If you are leaving by choice, the resignation letter generator drafts a notice that matches section 35, and our termination notice guide explains the periods. Business Radar’s guide to pension withdrawal rules when you leave a job covers the retirement savings side. For the wider picture, start with our plain-English guide to the Employment Act, then browse new jobs in Kenya.

Key takeaways

• Statutory service pay under section 35(5) is excluded for NSSF members and members of registered pension, CBA or better employer schemes.
• Courts set aside service pay awards where payslips show NSSF deductions, so documents decide these claims.
• Gratuity in a contract, CBA or wage order still applies despite NSSF because section 26(2) gives effect to more favourable terms.
• Severance pay for redundancy is separate and is not cancelled by NSSF membership.
• Gratuity earned after 1 July 2025 is tax-exempt; gratuity earned earlier is taxed in the years it was earned.

Frequently asked questions

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