Gratuity Calculation in Kenya for Employers

Gratuity calculation in Kenya starts with the employee's contract, applicable collective bargaining agreement (CBA) or incorporated policy, not a universal statutory rate. Apply the specified salary base, accrual rate and qualifying service, then assess tax according to when the gratuity was earned. The statutory minimum of 15 days' pay per completed year belongs to redundancy severance, not gratuity generally.

Identify the Payment Before Calculating

Use this decision sequence before entering an amount in the final settlement:

• Is there a gratuity promise? Read the contract, applicable CBA and incorporated policy. Identify the formula and payment conditions.
• Is this a redundancy? Assess severance separately under section 40 of the Employment Act. The minimum is 15 days' pay for each completed year of service.
• Could statutory service pay apply? Assess section 35 and its exclusions. Do not substitute a gratuity calculator for that eligibility check.

Section 35(5) provides service pay for every year worked where the relevant contract is terminated, but leaves its terms to be fixed. It does not prescribe a nationwide 15-days-per-year formula.

Section 35(6) excludes employees who were members of NSSF, a registered pension or provident fund, a gratuity or service-pay scheme established under a CBA, or another more favourable employer scheme. Those exclusions do not by themselves cancel a separate contractual gratuity promise.

Keep these assessments distinct. A payslip description such as “end-of-service benefit” does not establish which entitlement you are calculating.

Build a Contract-First Calculation Worksheet

The Employment Act requires written employment particulars to state remuneration, its calculation method and other benefits. Written contracts are required for employment lasting three months or more, and employment particulars must be supplied within two months of commencement.

For gratuity, extract the following into a worksheet before using any calculator:

• Governing wording: Quote the clause and identify the contract, CBA or incorporated policy version.
• Salary base: Record whether it specifies basic salary, gross salary or another defined amount.
• Accrual rate: Copy the percentage, days or other contractual measure exactly.
• Qualifying service: Establish the relevant start date, end date and treatment of renewals.
• Completion rule: Identify whether the formula counts completed years, months or proportionate service.
• Salary changes: Establish whether the clause uses final salary or earnings during each accrual period.
• Payment trigger: Check the wording governing expiry, resignation, retirement, dismissal or another event.

Do not assume that fixed-term expiry automatically creates a gratuity entitlement. Equally, do not assume that resignation automatically removes one: apply the governing promise and its conditions.

Where a CBA, policy and contract appear inconsistent, flag the conflict for review rather than silently selecting the cheapest formula. Keep the interpretation with the employee's employment records.

Apply the Formula Without Inventing a Rate

A Percentage of Eligible Earnings

Where the clause awards a percentage of earnings accumulated during qualifying service:

Gratuity = eligible earnings over qualifying service × contractual percentage

Build the eligible earnings total from payroll records. If the clause specifies basic salary, exclude allowances and other benefits from that base. The Employment Act defines basic salary as gross salary excluding those amounts.

For a salary-change worksheet, create separate entries for each period in which the eligible salary differed. Apply the contractual percentage to each period's eligible earnings, then add the results. This avoids treating the final salary as though it applied throughout employment.

A Days-Per-Year Clause

Where the governing clause specifies days of pay for each qualifying year:

Gratuity = contractual daily pay × contractual days per year × qualifying years

Use the daily-pay conversion supported by the governing arrangement. Do not insert an assumed monthly divisor merely because an online calculator requires one.

If the clause instead expressly uses final salary, follow that wording. A historical-earnings formula and a final-salary formula are different calculations, even when both are described as gratuity.

Incomplete Service and Renewals

Apply the clause's completed-service or pro-rating rule. Do not round an incomplete year up or discard it without checking the wording.

Review renewals together, including any earlier gratuity settlements. Identify the service covered by the current calculation so that the worksheet neither counts an already settled period twice nor omits service covered by the promise. If the documents do not answer the question, record the uncertainty and obtain a reviewed interpretation before approval.

Split Gratuity by When It Was Earned

KRA's Guidance on Tax Exemption on Payment of Gratuity states that gratuity earned after 1 July 2025 is exempt from income tax. Gratuity relating to periods before 1 July 2025 remains taxable even if paid after that date.

Keep an accrual schedule showing the service periods, applicable salary base and amount attributable to each period. Where service spans the change, derive the split from the governing formula rather than allocating the entire payment to the exit month.

Calculate Tax on the Earlier Portion

KRA directs employers to:

• Allocate taxable gratuity to the periods to which it relates, up to four years back.
• Treat any remaining balance for earlier periods as income of the fifth year.
• Add each allocated annual portion to the employee's other employment income for that year.
• Recalculate tax using that year's prevailing rates.
• Recover the difference between the recalculated tax and PAYE already paid.

This requires historical payroll and PAYE records. Applying only the payment month's tax bands to the whole taxable lump sum does not follow that method.

KRA also says pre-1 July 2025 gratuity paid into a registered pension scheme is not chargeable to tax subject to prescribed limits, and only to the extent the employee did not already receive a pension-contribution deduction in the relevant years. Do not treat a pension transfer as an unlimited exemption.

Use the Kenya PAYE calculator for ordinary salary planning, not as a substitute for this historical allocation. Keep the gratuity tax schedule with your payroll records.

For taxable employment payments, KRA requires PAYE payment and the return on or before the ninth day of the following month.

Assemble the Final-Dues File

Keep gratuity separate from other settlement items so that HR, payroll and the employee can trace its basis. Retain:

• Signed contract, renewals and the applicable CBA or policy.
• Service dates, payment-trigger evidence and previous settlement records.
• Payroll history supporting the chosen salary base.
• NSSF or pension evidence used in the service-pay assessment.
• Formula worksheet and earned-period tax allocation.
• Historical income, PAYE figures, approval and employee acknowledgement.

If the exit is redundancy, the calculation does not replace the process. Section 40 requires at least one month's written notice stating the reasons and extent of redundancy, to the union and local labour officer for unionised employees, or the employee and local labour officer otherwise.

Include the certificate of service in the exit workflow. Section 51 requires it for employees employed continuously for at least four weeks, subject to statutory exceptions.

FAQs

Is Gratuity Mandatory for Private-Sector Employers?

The Employment Act does not prescribe a universal contractual gratuity entitlement or calculation rate. Check the contract, applicable CBA and incorporated policy for a promise. Assess statutory service pay and redundancy severance separately.

Is 15 Days' Pay per Year the Gratuity Formula?

No. That is the statutory minimum redundancy severance rate for each completed year under section 40. Contractual gratuity follows its governing clause, and section 35 does not set that nationwide service-pay formula.

Does NSSF Membership Remove Gratuity?

NSSF membership excludes statutory service pay under section 35(6). It does not by itself cancel a separate contractual gratuity promise. Review membership evidence and the contractual entitlement separately.

Should I Use Basic or Gross Salary?

Use the base specified in the governing clause. Basic salary excludes allowances and other benefits under the Employment Act, so it is not interchangeable with gross salary. Resolve unclear wording before approving the calculation.

Is Gratuity Paid After 1 July 2025 Tax-Free?

Not necessarily: KRA bases the exemption on when gratuity was earned. Amounts relating to periods before 1 July 2025 remain taxable even if paid later. Apply KRA's historical allocation method to that portion.

Sources

Kenya Law - Employment Act, 2007 - Written particulars, salary definition, service pay exclusions, redundancy and certificates of service.

Kenya Revenue Authority - Guidance on Tax Exemption on Payment of Gratuity - Earned-period exemption, historical tax allocation and pension-transfer conditions.

Kenya Revenue Authority - PAYE - Employer PAYE obligations and payment and return deadline.