Gratuity and tax after the Finance Act 2026
The two conditions KRA says gratuity must now meet to be tax-exempt in Kenya, when the change applies, and how to pay gratuity through payroll correctly.
By Achekam · · 4 min read · For Running a business businesses in Kenya
Contract staff in Kenya are often promised a gratuity at the end of their term: a lump sum that rewards them for completing the contract. For years, employers and employees alike have understood part of that payment to be tax-free. The Finance Act 2026 changes the terms on which that holds.
For an employer, this is not an abstract tax point. A gratuity that no longer qualifies for exemption is taxed through PAYE, and the employer is the one who deducts and pays it. Get it wrong and the shortfall is the employer's problem: KRA says failure to deduct and account for PAYE attracts a penalty of 25% of the tax involved or KShs 10,000, whichever is higher. This article sets out the new conditions as KRA describes them, when they apply, and how to handle gratuity in payroll.
The new conditions
According to KRA's summary of the Finance Act 2026, gratuity is exempt from tax only where both of these hold:
- The contract is long enough. The contract of service runs for at least three continuous years, or is an extension of a three-year contract.
- The amount is within the limit. The gratuity is no more than 31% of the emoluments the employee earned over that period.
Both conditions have to be met. A generous gratuity on a short contract fails the first; a long contract with a gratuity above the limit fails the second.
KRA sets out the change on its page Finance Act 2026: what it means for you, which summarises each amendment and its start date.
The limit on the amount
The 31% limit is measured against the emoluments earned during the contract period. In practice, that means you need a reliable total of what the employee was paid over the whole contract, not just their final salary.
An illustration in words: an employee on a three-year contract whose gratuity is a set percentage of total pay over those three years can check that percentage against the limit directly. Where gratuity is calculated some other way, such as a number of months' final salary, compare the resulting amount with 31% of the total emoluments before assuming it is exempt.
Older KRA PAYE pages describe a different exemption, of up to Kshs 360,000 per year of service. That is the earlier position; KRA's Finance Act 2026 summary is the newer statement. Do not rely on old guidance or old payroll notes.
When the change applies
KRA says most Finance Act 2026 amendments took effect on 1 July 2026, and names separate dates only for the import documentation requirement and the new income tax filing timelines. For a contract that started before July 2026 and ends after it, confirm with KRA or your tax adviser how the new conditions apply before you pay.
The wider set of changes in the Act is covered in Finance Act 2026: changes for Kenyan businesses.
Paying gratuity through Achekam's regular pay run
KRA says anyone who pays emoluments to employees must register for PAYE, deduct tax from employees' pay, and remit and account for it to KRA. Gratuity is paid through payroll like any other emolument.
In Achekam, there is no separate bonus or final-settlement pay run. A gratuity goes in as a variable input on the regular run, alongside items such as overtime, commission and allowances. Kenyan payroll calculates PAYE with personal and insurance relief, NSSF Tier I and II, SHIF, the Affordable Housing Levy and the NITA levy.
Decide before the run whether the gratuity is exempt, taxable or partly each, with your adviser if needed, and check the PAYE result on that employee's payslip before approval. That check matters because of how approval works: a pay run is approved by someone other than the person who prepared it, and an approved run is never recalculated. The time to get the gratuity right is before the approver signs off.
Tax tables and updates in Achekam
Achekam ships its payroll tax tables pre-loaded but unconfirmed. No pay run uses a table until a named person at the business confirms its own copy. For Kenya, the shipped table is for 2026.
There is a limit to plan for. Only the 2026 Kenyan payroll table ships, and the app can confirm a table but cannot create or edit one, so a 2027 table cannot be set up in the app today. If a gratuity falls due in a period that needs different figures, flag it early.
Contract terms to review now
Go through every contract that promises a gratuity and check:
- The length. Is it at least three continuous years, or an extension of a three-year contract?
- The formula. How is the gratuity calculated, and does it stay within 31% of emoluments for the period?
- The wording. Does the contract promise a "tax-free" gratuity? If so, take advice, because the tax treatment now depends on conditions the contract may not meet.
- Renewals. Is a renewal an extension of the original contract or a new one? The answer affects the first condition.
- Records. Do you have a full record of emoluments over the whole contract to test the limit?
New contracts should be drafted with the conditions in mind; see the written employment contract. How the remaining taxable amount is taxed is explained in how PAYE bands are calculated.
List every employee due a gratuity in the next twelve months and test each one against both conditions now, while there is still time to talk to them about it.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
