KRA Issues Directives to Employers on Payment of Tax on Gratuity Earned Before July 2025
- The Finance Act 2025 introduced a tax exemption on all gratuity payments starting July 1, 2025
- The Kenya Revenue Authority (KRA) issued directives to all employers to follow for the implementation of the act
- KRA said all bonus payments to employees by companies before the implementation of the act will be subject to tax
The Kenya Revenue Authority (KRA) has issued guidance on the tax exemption applied to gratuities starting July 2025.
Source: Twitter
KRA directed all employers to implement the provisions contained in the Finance Act 2025.
Which gratuity payment will be tax-exempt?
In a notice to the public on Tuesday, August 12, the KRA stated that the tax exemption will only apply to gratuity earned after July 1, 2025.
"The Kenya Revenue Authority informs the public that the Finance Act, 2025, has amended the Income Tax Act to exempt the payment of gratuity from income tax. This exemption applies to gratuity earned after 1st July, 2025," read the notice in part.
However, the authority noted that gratuity payments received before the implementation of the Act will be subject to tax.
Gratuity is a lump sum payment by an employer rewarding an employee for long service after retirement or resignation.
What are KRA's directives on gratuity earned before July?
The taxman clarified the tax treatment of gratuity earned before July 1, 202, with the following directives:
- Gratuity earned or relating to periods before July 1, 2025, even where payment is made after this date, is chargeable to tax. The gratuity is taxed as part of employment income and is taxable in the year it was earned.
"This means that where gratuity is paid to an employee, it should be spread to the period to which it relates, up to four (4) years back, and any remaining amounts relating to periods beyond four (4) years shall be deemed income of the fifth year. The gratuity will then be taxed at the applicable tax rates in the respective years," KRA explained.
- In computing the taxable income for the periods outlined above, the employer shall consolidate the gratuity payable for each year with other employment income earned by the employee during the respective period and subject the consolidated income to tax at the prevailing tax rate for that year. Tax payable shall be the difference between the tax arrived at on the consolidated amount and what was paid earlier on the emoluments already received.
- Where an employer pays gratuity relating to periods before July 1, 2025, to a registered pension scheme, the gratuity amounts paid into the scheme shall not be chargeable to tax, subject to prescribed limits in the respective years of income. This shall apply to the extent that the employee had not enjoyed a deduction for pension contribution in the respective years of income.
- An employer making payment of gratuity upon retirement of an employee is still required to account for applicable taxes as guided above.
- For gratuity paid out of a public pension scheme, which was exempted from tax by the Tax Laws (Amendment) Act, 2024, effective 27th December, 2024, the guidance above shall apply with respect to periods before December 2024, before the exemption came into force.
A public pension scheme is defined as a pension scheme that pays pensions or lump sums out of the Consolidated Fund.
Source: Getty Images
Finance Act 2025 tax relief
The Finance Act 2025 introduced a tax exemption on all gratuity payments starting July 1, 2025.
President William Ruto assented to the act, introducing several other new laws following amendments to the Income Tax Act, VAT and other tax measures.
The Act directs employers to apply all available tax reliefs and exemptions when calculating Pay As You Earn (PAYE) taxes for their employees.
Proofreading by Jackson Otukho, copy editor at TUKO.co.ke.
Source: TUKO.co.ke
