8.1 Withdrawals from registered pension schemes

Where an employee receives his pension benefit in form of annuities; the first Ksh 300, 000 p.a.   (Ksh. 25, 000 p.m) is exempted from taxation. This has been increased from Ksh. 180,000  W.e.f  1 January 2010  Any amounts in excess of this limit shall be subject to tax with the other incomes at the individual scale rate of tax. This will benefit  resident  retirees who are below the age of of 65 years, as  those at 65 years and above are exempted from tax on their monthly pensions.

Any pension annuities paid from unregistered funds will NOT be taxed.


8.2 Lump sum payments out of and withdrawals from registered pension and provident funds

For lump sum received in commutation of a registered pension fund, the exempt amount shall be the lower of:

  • 600,000; or
  • 60,000 x no. of years of service in that employment if less than ten years.

Any amounts in excess of the above limits shall be taxed with other incomes.

Lump sum payments and withdrawals from unregistered pension funds are NOT taxable.


The tax-free limit on commuted lump sums has been increased from sh. 480 000 to sh.600 000 while the limit on withdrawals has been increased from sh. 48 000 to sh. 60 000 per annum subject to a limit of sh. 600 000. This also covers benefits paid by NSSF which is limited to sh. 600 000.

Withdrawals made in lump sum by retirees above the age of Fifty or retirees who have contributed to the scheme for more than fifteen years are taxed in bands of Ksh. 400,000. For early retirees the pension is taxed at the normal graduated scale (see WHT rates)


 8.3 Taxation of Bonuses/ Gratuity Employment Income Treatment – General

Employment income is assessable on accrual basis; that is, over the period it has been earned and become due for payment. The time the Income is received is, therefore, immaterial.  Income from employment or services rendered is chargeable to tax under section 3(2)(a)(ii) of the Income Tax Act. This is expounded by section 5(2) which spells out that gains or profits from employment includes: wages, salary, payment in lieu of leave, fees, commission, bonus, gratuity,

subsistence, travelling, entertainment or any other allowance received in respect of employment or services rendered.

Where an amount is received in respect of employment or a service rendered in a year of income

different from the year of accrual, such income is deemed to be income of the year of accrual. However, there is a provision which states that where the year of accrual is earlier than 4 years prior to the year of receipt, the income is to be treated as that of year of income which expired 5 years prior to the year in which the income is received or prior to the year of income in which employment ceased.


8.4 Compensation for Termination of Employment

Liability extends to any payment, whether voluntary or obligatory made to a person to compensate him for the termination of his contract of employment or services, whether the contract is written or verbal and whether or not there is provision in the contract for such payment.

Methods of Spreading Compensation

Method I

Where the contract is for a specified term, amount received as compensation on termination of

contract shall be deemed to have accrued evenly and assessed over the unexpired period.


A contract for five years was terminated on 31/12/2012 after it had run for 3 years. Compensation of Kshs.1,100,000 is paid. The amount will be spread evenly and assessed in the remaining period of 2 years as follows:-

Year Taxable Amount (Kshs.)
2013 550,000
2014 550,000

Method II      

Where the contract is for an unspecified term and provides for terminal payment, the amount paid as compensation is to be spread forward and assessed at the rate equal to employee’s remuneration per annum received from the contract immediately before termination.


A contract for an unspecified term provides for payment of Kshs. 700,000 as compensation in the event of termination. It is terminated on 31/12/2012 and the employee’s rate of earning was Kshs. 300,000 per annum. The compensation is spread forward as follows

Year Taxable Amount (Kshs.)
2013 300,000
2014 300,000
2015 100,000


Method II

Where the contract is for unspecified term and does not provide for compensation, amount received as compensation shall be deemed to have accrued evenly over three years period immediately following termination of contract.


A contract is for an unspecified term with no provision for payment of compensation. The contract is terminated on 31/12/2012 and Kshs. 1,500,000 compensation is paid, the amount is to be spread forward and assessed evenly in three years as follows:-

Year Taxable Amount (Kshs.)
2013 500,000
2014 500,000
2015 500,000


– The methods outlined above apply to all employees including whole time service directors.

– If an Ex-gratia is paid it would be assessable in the year of receipt.

– Use the current rates of tax until subsequent years rates are enacted.

– Personal Relief should not be granted in advance before commencement of any year of income.


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