Introduction
Retirement benefits in Kenya are taxed under the Income Tax Act within the framework of registered pension and provident schemes. Recent reforms under the Tax Laws (Amendment) Act, 2024 and the Finance Act, 2025 have enhanced tax reliefs, increased contribution limits, and expanded exemptions—particularly for gratuity. The overall policy direction is to encourage long-term savings and strengthen retirement income security.
Pension Contributions
Contributions made by an employee to a registered pension, provident, or individual retirement fund are deductible from taxable income, capped at the lower of
- actual contribution,
- thirty percent of pensionable income,
- or KSh 30,000 per month (KSh 360,000 per annum).
For the purposes of this section, contributions made to the National Social Security Fund shall be deemed to be contributions made to a defined contribution registered fund.
Employer contributions to registered or unregistered retirement benefit schemes are generally not taxable in the hands of the employee. However, contributions made by tax-exempt entities to unregistered retirement benefit schemes, as well as excess contributions (above KSh 30,000 per month) to registered schemes, are taxable on the employee.
To illustrate, assume a church, being a tax-exempt entity, contributes KSh 40,000 per month to a registered pension fund on behalf of its employee, a bishop. In this case, the bishop will be subject to tax on the excess contribution of KSh 10,000, being the amount above the statutory limit.
Contributions to post-retirement medical funds are also deductible up to KSh 15,000 per month.
Withdrawals from Pension Scheme upon Retirement
With effect from 27 December 2024, benefits payable from a registered pension or provident scheme are exempt from tax where the member:
- has attained the retirement age as prescribed under the respective retirement scheme;
- withdraws accrued benefits prior to retirement age on account of ill health; or
- withdraws benefits after a minimum membership period of twenty (20) years in the scheme.
Withdrawals that do not meet the above conditions may be subject to tax in accordance with the provisions of the Income Tax Act.
Gratuity
Gratuity is now significantly favoured. Gratuity paid from a public fund is exempt from tax with effect from December 2024. The Finance Act, 2025 extends this exemption to all gratuity payments from July 2025. The exemption applies progressively, meaning amounts accrued before these dates remain subject to prior tax rules where gratuity income was spread and taxed in the year of accrual.
A recipient of gratuity may elect to channel the amount into a registered pension scheme, thereby benefiting from the applicable tax reliefs. Where gratuity is paid into such a scheme, it is exempt from tax within the prescribed limits (currently KSh 30,000 per month), to the extent that the employee did not previously enjoy pension deduction on those amounts.
To illustrate, consider a taxpayer who receives gratuity of KSh 500,000 in 2026, relating to income earned in 2023. Ordinarily, this amount would be taxable, as it accrued prior to July 2025 when full gratuity exemption took effect. However, if the entire amount is contributed to a registered pension scheme, the position changes. One must revisit the 2023 tax year to determine the extent to which pension relief had already been claimed.
Assuming the individual had previously benefited from pension deductions of KSh 200,000 in 2023, only the balance of KSh 300,000 qualifies for exemption upon contribution to the pension fund. The KSh 200,000 already relieved remains taxable, as double benefit is not permitted.