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2026 KRA rates, instant
What counts as terminal dues
Terminal dues are all the payments that fall due when employment ends, whether you resigned, were dismissed, made redundant or reached retirement. In a typical Kenyan final settlement you will see some or all of the following: salary up to your last working day, payment for annual leave you accrued but did not take, pay in lieu of notice where the employer or employee cut the notice period short, service gratuity or a contractual end-of-service payment, and severance pay where the exit was a redundancy.
The mistake most people make is treating the whole lump as one figure and expecting a single tax rate. KRA does not work that way. Some components are taxed in the month you receive them, some are spread back over earlier years, and some are now exempt entirely. The employer is legally required to work out the tax on each part and remit it before releasing the balance, which is the same withholding logic that governs an ordinary payslip when you first learn how PAYE is calculated in Kenya.
Salary, leave pay and notice pay
The straightforward parts come first. Your final month of salary is taxed exactly like any other month, on the ordinary progressive PAYE bands after the usual statutory deductions and the personal relief of KES 2,400 a month. Terminal pay is one of several real-world situations where payroll PAYE and your final tax bill can diverge, so it pays to know which rule applies to each line.
Accrued leave pay is treated as income of the year to which it relates rather than a windfall in your final month. Where the leave was earned across the current year it is simply added to your final pay and taxed at the normal rates. Payment in lieu of notice is taxed immediately, in the period following the date your employment ends, again at standard PAYE rates. Neither of these enjoys any special exemption, so if your employer lumps them into one big month the higher bands can bite. That is the same bunching effect you see when an employer taxes a bonus or thirteenth-month payment, and it is why the tax on a final settlement often looks steeper than a normal month.
Service gratuity: the July 2025 change
Gratuity is where the rules changed meaningfully. For years, service gratuity paid as a lump sum was spread backwards and taxed as though it had been earned across the relevant years of service, up to a limit of the prior five years, with anything older bundled into the fifth year and taxed at that year's annual rates. That spread-back method softened the blow compared with taxing the whole amount in one month, but the payment was still taxable.
Under the Finance Act 2025, gratuity earned on or after 1 July 2025 is fully exempt from income tax. The portion of your gratuity that accrued before that date is still taxable and still uses the spread-back method; only the post-July-2025 slice is tax-free. So on a contract that straddles the change, your employer should split the gratuity by the period it was earned in, exempt the newer part, and apply the spread-back calculation only to the older part. If your whole entitlement accrued after mid-2025, the gratuity should reach you untaxed. This exemption follows an earlier move in December 2024 that had already exempted gratuity paid out of public funds, and the guidance is set out in the Kenya Revenue Authority's own material on how lump sum payments are taxed.
Severance pay on redundancy
Severance is the statutory payment due when a role is made redundant, calculated under the Employment Act at not less than fifteen days' pay for each completed year of service. It is a distinct payment from gratuity and is not automatically exempt. Where severance is paid as a lump sum covering several years, it follows the same spread-back treatment as taxable gratuity: the amount is allocated to the years it relates to and taxed at those years' annual rates rather than crammed into a single month at the top marginal rate.
Redundancy also carries process rights, including notice to the employee and the labour office, and payment of leave due and notice, all of which the Employment Act sets out. The employment-law detail behind those obligations is published by the National Council for Law Reporting on Kenya Law, which is the authoritative source for the Act itself rather than a summary of it.
Pension and retirement lump sums
If you leave to retire, or you withdraw from a registered pension or provident scheme, that lump sum is taxed under the retirement-benefit rules, not the ordinary gratuity rules. Since the December 2024 changes, withdrawals are exempt from tax where you have reached the scheme's retirement age, where you have completed a minimum membership period of twenty years, or where you are leaving on grounds of ill health. Early withdrawals that meet none of those conditions can still attract tax on the taxable portion.
There is also a planning move worth knowing. A recipient of gratuity can elect to channel it into a registered pension scheme instead of taking it in cash, which lets the older taxable portion benefit from pension relief of up to KES 30,000 a month, provided you did not already use that relief on the same income. Preserving and topping up a scheme this way is the same logic behind making the most of your pension contributions while you are still employed.
Check the figure before you sign
Because employers combine several components in one settlement, errors are common. The right way to verify is to rebuild the calculation the way KRA expects: take your other taxable pay for the year, add the taxable lump sum, work out the tax on the revised annual total at the annual rates, then subtract personal relief and the PAYE you have already paid during the year. The balance is the tax properly due on the lump sum. If the amount withheld is well above that, you are owed a refund at year-end.
You can sanity-check the ordinary monthly parts of your settlement with the Kenya PAYE calculator, and keep every payslip and your P9 so the year-end reconciliation matches. If the numbers still do not line up, the same steps apply as when an employer has been deducting the wrong PAYE: raise it in writing, ask for the computation, and reconcile against your P9 before you file. Getting this right at exit protects both the money you are owed today and the return you file next.