Gratuity payments to retirees exempted from tax in new policy

Kenya’s retirees are set to receive a financial boost after the Cabinet approved a policy to exempt gratuity payments from taxation.

The new measure is aimed at improving the welfare of retired workers and ensuring they enjoy their retirement years with full benefits.

The announcement followed a Cabinet meeting held on Tuesday at State House, Nairobi, and chaired by President William Ruto.

In a dispatch issued after the meeting, the Cabinet stated, "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."

Gratuity, also referred to as severance pay or service gratuity, is a lump sum paid to an employee when they retire or leave their job.

Although not a legal requirement under most Kenyan laws, apart from the National Social Security Fund (NSSF), gratuity is often included in employment terms or collective agreements.

In cases where a worker passes away before retirement, the payment may go to their legal heirs.

Previously, gratuity payments were subject to tax deductions, reducing the total amount received by the retiree.

The new tax exemption means retirees will now get the full amount stated in their contracts or agreements, without any deductions.

This development is part of the Finance Bill, 2025, which the Cabinet also approved during the meeting.

The Bill proposes a series of changes to strengthen tax administration, plug revenue leaks, and improve overall efficiency in tax collection.

Among the changes included in the Bill are measures to address loopholes in tax refunds and stop the misuse of tax reliefs.

The Bill aims to simplify tax refund procedures, close legal gaps that delay revenue collection, and reduce the number of disputes by amending various tax laws, including the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act.

The Cabinet pointed out that the reforms are designed to avoid raising taxes while making the system fairer and more efficient.

It said employers will also play a bigger role in tax calculations, especially when it comes to applying exemptions.

"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," the dispatch said.

This approach is expected to reduce delays in tax refunds and ease the burden on workers who have previously had to follow up on refunds.

The Cabinet noted that the reforms are in line with ongoing efforts to reduce government spending and improve how public funds are used.

These efforts form part of the Bottom-Up Economic Transformation Agenda (BETA), which aims to promote inclusive growth and support vulnerable groups, including retirees.

The tax exemption on gratuity is expected to bring relief to thousands of retired workers, especially those whose benefits have been delayed due to tax-related issues.