Career advice · Updated October 2026

Are Terminal Dues Taxable in Kenya? How KRA Taxes Notice Pay, Leave Pay, Gratuity and Compensation

When a job ends, the figure on your final dues statement is rarely the amount that reaches your bank account. The gap is mostly tax. So, are terminal dues taxable in Kenya? Generally yes, but not all in the same way. Notice pay, leave pay, gratuity, severance and compensation each follow their own rule about which year they are taxed in, and gratuity earned from 1 July 2025 is now exempt. This guide explains the rules using the Income Tax Act and Kenya Revenue Authority (KRA) guidance, so you can check what your employer has deducted.

If you have not yet worked out what you are owed, start with our final dues calculator or the terminal dues guide, then come back to see how each item is taxed.

The basic rule: taxed in the year it was earned

Section 5(2)(a) of the Income Tax Act treats wages, leave pay, payment in lieu of leave, bonuses and gratuity as employment income. Where any of it is received in a different year from the one it was earned in, it is treated as income of the year it was earned. If it relates to a year more than four years back, it is lumped into the fifth year back.

KRA explains in its blog on the taxation of lump sum payments that the employer must recover the tax before releasing the balance to you. In other words, PAYE on terminal dues is deducted at source, just like your monthly salary.

How each part of your terminal dues is taxed

Sources: Income Tax Act s.5(2); KRA lump sum guidance; KRA public notice of 12 August 2025.

Gratuity: the 1 July 2025 dividing line

The biggest recent change is to gratuity. 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 for earlier periods is still taxable, even if it is paid now. The notice says:

• Pre-July 2025 gratuity is spread back to the years it relates to, up to four years, with anything older treated as income of the fifth year.
• For each of those years, the employer adds the gratuity to your other pay for that year, recalculates the tax at that year’s rates, and deducts the difference from what you already paid.
• Pre-July 2025 gratuity paid into a registered pension scheme is not taxed, within the prescribed limits and only where you had not already claimed a deduction for pension contributions in those years.
• Gratuity paid from a public pension scheme out of the Consolidated Fund has been exempt since 27 December 2024.

So if you served on a contract that started before July 2025 and ended after it, expect your gratuity to be split: the earlier part taxed, the later part exempt. Our guide to service pay and gratuity covers who qualifies in the first place.

Severance pay on redundancy

Section 40 of the Employment Act requires severance pay of at least 15 days’ pay for each completed year of service when a job is declared redundant (see our redundancy guide). KRA’s worked example on lump sums treats “severance pay/service gratuity” as earned over the years of service and spreads it backwards in the same way as gratuity.

KRA’s 2025 notice talks about gratuity and does not say whether redundancy severance counts as gratuity for the new exemption. Do not assume it does. Ask your employer, in writing, how it has treated your severance pay and why, and if the amount is large, get advice from a tax adviser or KRA before you accept the figure.

Compensation for ending the contract

Section 5(2)(c) of the Income Tax Act taxes any amount received as compensation for the termination of a contract of employment, “whether or not provision is made in the contract” for it. The timing depends on the type of contract:

1. Fixed-term contract. The compensation is treated as earned evenly over the unexpired part of the contract.
2. Open-ended contract that provides for compensation. It is treated as earned in the period after termination, at the same annual rate as your pay just before you left.
3. Open-ended contract with no compensation clause. It is treated as earned evenly over the three years after termination.

The wording is wide enough to cover negotiated exit packages (“golden handshakes”). Compensation awarded for unfair termination is also, by its nature, compensation for ending the contract, so check the tax position with your advocate before a settlement or award is paid out.

How the employer works out the tax: KRA’s example

KRA’s employer’s guide to PAYE sets out the method. For each year a lump sum is allocated to, the employer:

1. Takes your total taxable pay for that year from the tax deduction card (P9A).
2. Adds the part of the lump sum allocated to that year.
3. Calculates tax on the new total at that year’s annual individual rates.
4. Deducts personal relief for the year.
5. Deducts the PAYE already paid that year. The balance is the tax due on the lump sum.

KRA illustrates this with an employee, Mr Peter Bakari, who left in September 2016 after 30 years. He received KSh 660,000 in severance pay/service gratuity, KSh 90,000 in notice pay and KSh 25,000 for 20 untaken leave days from 2015. KRA taxed the notice pay in 2016, the leave pay in 2015, and spread the gratuity at KSh 22,000 a year over 2011–2015, with the remaining KSh 550,000 treated as income of 2011, the fifth year back. KRA’s example predates the 2025 gratuity exemption, but the method is the same for any gratuity still taxable today.

Because each slice is taxed alongside the pay you actually earned in that year, two people with the same lump sum can pay different amounts of tax. That is why a single flat percentage is never the right answer.

What to check on your final payment

• An itemised statement. Ask for a breakdown that separates salary, notice pay, leave pay, gratuity, severance and any compensation, with the tax on each. Our terminal dues calculator helps you check the gross amounts.
• The years used. Leave pay should be allocated to the years the leave relates to, and pre-July 2025 gratuity to the years it was earned.
• Exempt gratuity. Check that gratuity earned from July 2025 has not been taxed.
• Your P9 and iTax. Request your P9 for the final year and confirm that the PAYE deducted was remitted. Our P9 form guide explains how.
• Pension money is separate. Withdrawals from a pension or provident fund follow their own tax rules; see Business Radar’s guide to pension withdrawal rules when leaving a job.

To see how PAYE bands and reliefs work on ordinary pay, use the PAYE calculator or read how PAYE works in Kenya. Looking for your next role? Browse the latest jobs in Kenya.

Key takeaways

• Most terminal dues are taxable employment income, and PAYE is deducted by the employer before you are paid.
• Notice pay is taxed in the period right after you leave; leave pay in the year the leave relates to.
• Gratuity earned from 1 July 2025 is exempt; earlier gratuity is taxed in the years it was earned.
• Compensation for ending a contract is spread under section 5(2)(c): over the unexpired term, forward at your previous pay rate, or evenly over three years.
• KRA’s notice does not say whether redundancy severance falls under the gratuity exemption, so ask before you accept.

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