Employment Tax in Kenya

Chapter 9

Tax Free Pension Benefits in Kenya

  1. Tax Free Pension - (s.8(4))

    • On retirement before 65yrs, the annual tax free pension is Kshs.300,000.
    • Pensions and lump sum payments after age 65 are tax free.
  2. Tax Free Lump Sum Payments / Withdrawals.

    • The first Kshs. 600,000/- lump sum commuted from a registered pension or individual retirement fund (s. 8(5)(a)).
    • At withdrawal upon termination of employment you are entitled to receive tax free lump sum payment from the fund of Kshs. 60,000/- for every full year of membership in the scheme up to a maximum of Kshs. 600,000/- (s. 8(5)(b)).
    1. The tax on the excess amount is then calculated as per the tax table 1 below - (Third Schedule para. 5(d)(ii))

    2. Band upto 2017 2018-20 2020-Apr 2021 Rate
      Kshs Kshs Kshs Kshs
      On First 121,968 147,580 288,000 288,000 10%
      On next 114,912 139,043 200,000 nil 15%
      On next 114,912 139,043 200,000 nil 20%
      On next 114,912 139,043 over 688,000 100,000 25%
      On over 466,704 564,709 n/a 388,000 30%

    3. However, the excess amount is subject to tax as per the table 2 below if you are (First Schedule para.53)

      • over 50 years of age, or
      • you have been a member of the scheme for more than 15 years or
      • upon earlier retirement on grounds of ill-health or infirmity of body and mind
      kindly note that this tax is final tax - (Third Schedule para. 5(d)(i))

    4. Band to 2020-Mar 2020-Apr 2021 Rate
      Kshs Kshs Kshs
      On the First 400,000 400,000 400,000 10%
      On the next 400,000 400,000 400,000 15%
      On the next 400,000 400,000 400,000 20%
      On the next 400,000 1,200,000 400,000 25%
      On over 1,600,000 n/a 1,600,000 30%

  3. Tax Free Benefits From NSSF - (s.8(5)d)
    The first kshs.600,000 benefits paid out of the National Social Security Fund (NSSF).
  4. Tax Free Lump Sum From HOSP - (s.8(5)e)
    In the case of a lump sum paid out of a registered home ownership plan (HOSP) and the amount is used in the purchase of an interest in, or for the construction of a permnent house for occupation by the depositor within 12 months after year of withdrawal.
  5. Pensions From Unregistered Schemes - (s.8(5)f)
    Exempt to the extent that

    • contributions were not allowed as a deduction and
    • the income thereof has been taxed.
  6. Upon Death - (s.8(6))

    1. Widow, widower or dependants shall qualify as a group as if the benefits were paid to the deceased if alive.
    2. Where the scheme provides for no payment of retirement benefits other than a lump sum to the estate, the first kshs.1.4 million is tax exempt.
  7. Surplus Funds Refunded to Employer - (s.8(10)b)
    Any surplus funds withdrawn by or refunded to the employer shall be deemed to be the income of that employer and taxed at 25& (before April 2020, 30%). @2014-2023 All rights reserved
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