Redundancy Pay and Tax in Kenya

A redundancy package in Kenya is not automatically tax-free and should not be treated as one undifferentiated payment. Separate severance, notice, unused leave, outstanding salary and any contractual gratuity before checking PAYE. The entitlement calculation and the tax calculation answer different questions.

Use the Kenya PAYE calculator to understand ordinary salary deductions. It is not a terminal-settlement calculator: a payment allocated across periods needs a separate payroll calculation. The employment and tax guide explains the wider context.

Identify the gross entitlements first

Section 40 of the Employment Act includes payment for due leave, notice or wages in lieu, and severance of at least 15 days' pay for each completed year of service. Kenya Law's published judgment quoting section 40 sets out those conditions. Redundancy also has procedural requirements; paying a sum does not by itself establish that the process was lawful.

Check the employment contract and any applicable collective agreement for better terms. Ask for the completed service years, salary basis and daily-rate method. A disputed termination process or disputed entitlement may need employment advice independently of the tax review.

Example: build an itemised settlement

Assume an agreed calculation uses four completed years, 15 days per year and a daily pay basis of KES 2,000. The illustrated severance is 4 × 15 × KES 2,000 = KES 120,000. Suppose the approved statement also lists KES 60,000 notice pay, KES 20,000 leave pay and KES 10,000 salary outstanding.

This is an entitlement illustration using an assumed approved daily rate, not a universal salary divisor or a net-pay quote. The bank payment follows only after the treatment of each component and any other lawful deductions has been established.

Do not relabel severance as exempt gratuity

KRA's current Finance Act 2026 summary describes conditions for gratuity exemption: a service contract of at least three continuous years or the relevant extension, and gratuity no more than 31% of emoluments over the period. Those conditions do not establish that every redundancy payment is gratuity.

Ask payroll to identify the actual payment category and legal basis for any exemption. A pension-scheme benefit also needs its own analysis. The terminal-dues guide explains why these categories should remain separate.

Check allocation and tax already paid

KRA's lump-sum guidance treats taxable termination payments according to their nature and relevant periods. It distinguishes notice, leave and compensation under different contract arrangements. Ask for an allocation schedule rather than assuming every component is taxed in the transfer month or spread identically.

Have payroll show the applicable rates, reliefs, prior tax credits and any exemption separately. Historical KRA examples are useful for method, but their old rates are not current rates. Keep the payroll evidence checklist alongside the settlement.

Before agreeing the final figures

• Reconcile service dates, salary basis and leave days.
• Separate every gross payment and identify any disputed item.
• Request the tax schedule and explanation of non-tax deductions.
• Match the approved net amount to the payment received.
• Keep the agreement, payslip, P9 and any corrected records.

If the tax calculation does not reconcile, follow the PAYE correction steps. Avoid accepting an unexplained percentage merely because the total is described as a redundancy package.

Sources and review date

Published and reviewed on 29 October 2026. Historical guidance explains allocation; use the law and rates applicable to each payment and period.

• KRA: taxation and allocation of lump-sum payments
• KRA: employer PAYE guide, section 21 (2017; historical rates)
• KRA: PAYE and taxable employment income