Updated 31 October 2026
Severance pay in Kenya is taxable: your employer must deduct PAYE before paying it, but KRA does not tax the whole lump sum in one month. Under KRA’s rules on taxation of lump sum payments, severance and service gratuity are spread back over the years in which they were earned, payment in lieu of notice is taxed in the period right after you leave, and leave pay is taxed in the year the leave relates to. Spreading the sum usually means less tax than treating it as one month’s pay.
Is severance pay taxable in Kenya?
Yes. KRA states that payments received on retirement or termination are taxable whether you left voluntarily or not. A lump sum can include gratuity, bonuses and severance pay. The employer is responsible for working out and deducting the tax before releasing the balance, as set out in KRA’s employer’s guide to PAYE.
How each part of your terminal dues is taxed
| Payment | How KRA taxes it |
|---|---|
| Severance pay / service gratuity | Spread back over the years earned (up to five years), added to income of each year and taxed at that year’s rates; any balance is taxed in the fifth year back |
| Payment in lieu of notice | Taxed in the period immediately after termination |
| Leave pay (untaken leave) | Taxed in the year the leave days relate to |
| Compensation, fixed-term contract | Spread evenly over the unexpired period of the contract |
| Compensation, open-ended contract with a terminal payment clause | Spread forward at the rate of your annual gross pay just before termination |
| Compensation, contract with no compensation clause | Treated as earned evenly over the three years after termination |
Worked example from KRA
KRA’s example: an employee leaves after 30 years and is paid KSh660,000 service gratuity, KSh90,000 for three months’ notice and KSh25,000 for 20 untaken leave days from the previous year.
- Notice pay of KSh90,000 is taxed in the year of exit.
- The gratuity is spread back: KSh22,000 is added to each of the previous five years’ income, and the remaining KSh550,000 is taxed in the fifth year back.
- The KSh25,000 leave pay is added to the year the leave relates to.
For each year, the employer recalculates tax on the revised taxable income using that year’s annual rates, deducts personal relief and the PAYE already paid, and the balance is the tax due on the lump sum.
How much severance pay are you entitled to?
For redundancy, the Employment Act (section 40) sets severance at not less than 15 days’ pay for each completed year of service. Your contract or a collective agreement can give more. Notice pay and pay for untaken leave are separate entitlements.
Pension money is taxed differently
Withdrawals from a pension or provident fund follow separate rules with tax-free amounts. See is pension withdrawal taxable in Kenya and pension withdrawal rules when you leave a job.
Checklist before you sign your discharge
- Ask HR for a written breakdown: severance, notice, leave, gratuity, salary arrears and deductions.
- Confirm the PAYE on each item was worked out using KRA’s spreading rules, not as one month’s pay.
- Get a P9 form for the final year so you can file your return.
- Check your payslips against the current PAYE tax bands; our payslip guide explains each deduction.
- If you dispute the amount, you can file a complaint at the Employment and Labour Relations Court or through a labour officer.
FAQ
Is severance pay tax-free in Kenya?
No. It is taxable employment income, but KRA spreads it over the years it was earned.
Is notice pay taxable?
Yes, in the period immediately after termination.
How is leave pay taxed when I leave?
It is taxed in the year to which the untaken leave days relate.
Who calculates the tax on my severance?
Your employer must deduct the correct tax before paying you.
Updated October 2026.
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