By Salame Leah
Nairobi, Kenya: The Finance Bill has traditionally been viewed as a tax and compliance document, attracting the attention of finance and tax professionals. However, a closer examination of the proposed changes in the Finance Bill 2026 reveals implications that extend beyond taxation, touching on workforce management, employee benefits and human resource (HR) policies. As a result, HR professionals may need to rethink benefit structures and workplace arrangements in response to the proposed reforms.
One notable proposal concerns gratuity, a term commonly understood as a lump-sum payment made to employees upon retirement, completion of a contract, resignation or termination of employment. Gratuity serves as recognition of long and continuous service and is often provided under fixed-term employment contracts.
In Kenya, gratuity is not automatically mandatory unless expressly provided for through an employment contract, a Collective Bargaining Agreement (CBA), an HR policy or an employer-established scheme. Historically, gratuity paid as employment income was subject to Pay As You Earn (PAYE) tax up to 30 June 2025.
In contrast, pension and provident fund benefits have enjoyed tax exemptions under specific circumstances, including payments made upon retirement, withdrawals due to ill health or withdrawals made more than twenty years after a fund’s registration.
The Finance Act 2025 introduced a significant shift by exempting gratuity from PAYE. Subsequently, the Kenya Revenue Authority (KRA) clarified that the exemption applied only to gratuity accrued from 1 July 2025. The Finance Bill 2026 now proposes to introduce specific conditions under Section 5 of the Income Tax Act to govern gratuity exemptions. These proposals appear aimed at clarifying the law while limiting opportunities for aggressive tax planning.
Emerging HR Questions
Three key themes emerge from the proposed changes. First is the introduction of a minimum continuous service period of three years before gratuity can qualify for favourable tax treatment. This raises important HR considerations, particularly for organizations that provide gratuity from the first year of employment, immediately after probation or as a short-term retention incentive.
It may also affect employees engaged on one-year contracts. Consequently, employers may need to review employment contracts, retention strategies and HR policies while preparing for possible employee dissatisfaction or disputes arising from changing benefit expectations.
Second is the proposal to limit allowable gratuity contributions to 31% of an employee’s basic salary. While this threshold mirrors the public sector gratuity scale, organizations operating more generous gratuity schemes may face additional tax exposure. HR teams will therefore need to reassess existing benefit structures to determine their tax implications, compliance risks and long-term sustainability. Armed with this understanding, HR professionals can better advise management on the costs and consequences of maintaining or revising current arrangements.
Third is the proposal aimed at preventing employees from benefiting simultaneously from multiple tax-advantaged retirement arrangements. Employees already enjoying pension-related tax benefits may not qualify for similar gratuity-related tax optimization.
In practice, employers may need to choose between pension schemes, gratuity arrangements or carefully designed hybrid models. HR professionals will also need to consider the implications of additional voluntary pension contributions and how they affect eligibility for gratuity tax exemptions.
Navigating the Changes Ahead
Further clarity will be required once the Finance Act 2026 is enacted, particularly on whether mandatory contributions to the National Social Security Fund (NSSF) could affect qualification for gratuity exemptions.
As the famous principle attributed to Isaac Newton reminds us, every action has a reaction. While the proposed reforms seek to strengthen tax administration and provide greater clarity, they may also trigger changes in employee expectations, benefit design and workforce management practices.
For HR professionals, the message is clear: the Finance Bill 2026 is not merely a tax matter. It is a workplace issue that demands close attention. Organizations should begin reviewing their contracts, policies and employee benefit structures now to prepare for the potential impact of the proposed changes.
Salame Leah Is a Human Resource Officer, Ichiban Tax & Business Advisory LLP
