When someone leaves, the final payslip is usually the one they read most carefully, and the one most likely to end up in front of a labour officer. Most disputes start with an item that was left out or a figure nobody can explain. Build the final dues as a list, with the section of the Employment Act or the contract clause behind each line.
What goes into final dues
| Item | Where it comes from | Applies when |
|---|---|---|
| Salary to the last day worked | Contract; s.18 | Always |
| Notice pay | s.35(1)(c) and s.36, or the contract | Notice not worked |
| Accrued annual leave not taken | s.28(1)(b) | Always, if days are due |
| Service pay | s.35(5) and (6) | Rarely, see below |
| Gratuity | Contract or CBA | If the contract provides it |
| Severance | s.40(1)(g) | Redundancy only |
| Less: lawful recoveries | s.19 | Loans, advances, overpayments |
Salary to the last day. Pro-rate the month. Pick one method in your policy and use it for every leaver: most payrolls use calendar days for joiners and leavers, so someone on KES 60,000 who leaves on 20 September is paid 20 ÷ 30 × 60,000 = KES 40,000.
Notice. For a monthly-paid employee the statutory minimum is 28 days’ written notice (s.35(1)(c)), and the contract can set longer. If the notice isn’t worked, s.36 lets either side end the contract by paying what would have been earned over the notice period. An employee who resigns without serving notice owes the same in the other direction, which is why notice pay sometimes appears as a deduction.
Leave. Section 28(1)(b) gives a leaver at least 1.75 days for each completed month in the current leave year, once they have two consecutive months of service in it. Add any days carried forward. The rate per day is a policy choice the Act doesn’t fix: dividing basic pay by 30 is common for leave payouts, and some employers use working days. Write the divisor down and apply it consistently.
Service pay and gratuity are not the same thing
Section 35(5) gives an employee on a monthly contract service pay for every year worked. The Act doesn’t set the rate, and the 15 days’ pay per completed year seen in many contracts and CBAs mirrors the redundancy figure in s.40. The bigger point is s.35(6): service pay doesn’t apply if the employee is a member of NSSF, a registered pension or provident fund, or a gratuity or service pay scheme under a CBA. Since almost every employee is in NSSF, service pay is rarely owed. Paying it by default is a common and expensive mistake. Paying it where a contract promises it anyway is a different matter: the contract governs.
Gratuity is contractual. It is common on fixed-term contracts, especially for expatriates and donor-funded projects, and is usually a percentage of basic pay for each month of the contract.
The Finance Act 2026 gratuity exemption
From 1 July 2026, the Finance Act 2026 exempts gratuity from income tax if both of these hold:
- the contract of service is for at least three continuous years, or is an extension of a three-year contract; and
- the gratuity doesn’t exceed 31% of the employee’s emoluments earned over that period.
KRA’s guidance asks employers to make sure only gratuity that meets both conditions gets the exemption. A two-year contract fails the first test outright, however the gratuity is calculated. Where the gratuity is above 31%, treat the part above the limit as taxable. Keep the contract start date and a running total of emoluments on file for every gratuity-bearing contract, because you’ll need both figures to support the exemption if KRA asks.
Commentaries differ on whether the 31% is measured against total emoluments or base salary. KRA’s own summary says emoluments. If your gratuity sits near the limit, get the measure confirmed before you pay.
Redundancy dues
Redundancy has its own list in s.40(1):
- notice to the union (if any) and the local labour officer at least a month before, or personal written notice to a non-union employee with notice to the labour officer;
- any leave due, paid in cash;
- at least one month’s notice or one month’s wages in lieu;
- severance of at least 15 days’ pay for each completed year of service.
So someone on KES 60,000 with seven completed years gets severance of at least 15 × 2,000 × 7 = KES 210,000, if a day’s pay is taken as basic ÷ 30. A CBA or the contract may be more generous, and courts look closely at how “a day’s pay” was worked out, so state it in the redundancy letter.
How final dues are taxed
Salary, notice pay, leave pay, severance and any gratuity that fails the exemption test are all employment income. KRA’s PAYE guide sets out some timing rules that matter for large payouts:
- notice pay is assessed in the period right after the termination date;
- leave pay is assessed in the year the leave days relate to;
- compensation for termination of a contract is spread: over the unexpired term for a fixed-term contract, and forward over the following years for an open-ended one.
For a modest final payment in the same tax year, most payrolls simply run everything through the final month. Here is the resignation case above: KES 40,000 of salary plus 12 untaken leave days at KES 2,000, with NSSF on the salary portion.
| Item | KES |
|---|---|
| Salary to 20 September | 40,000.00 |
| Leave pay, 12 days | 24,000.00 |
| Gross | 64,000.00 |
| NSSF | 2,400.00 |
| SHIF | 1,760.00 |
| Housing Levy | 960.00 |
| PAYE | 10,047.35 |
| Net final dues | 48,832.65 |
For a large redundancy or settlement payment, work out the spread before you pay, ideally with your tax adviser, because a lump sum pushed through one month’s PAYE can over-deduct sharply.
Recoveries
Loans and advances can be recovered only as the written agreement allows, and s.19(3) limits total deductions to two-thirds of wages. Don’t net off disputed items such as lost equipment without evidence and a basis in s.19(1). If clearance is outstanding, pay what isn’t in dispute rather than holding back everything. Section 18(4) requires dues on a summary dismissal to be paid on dismissal, and withheld dues are a frequent claim.
Paperwork the leaver must get
- Certificate of service (s.51), for anyone employed four consecutive weeks or more. It states your name and postal address, the employee’s name, start and end dates, and the nature and usual place of the work. You don’t have to comment on conduct. Failing to issue one is an offence, so never make it conditional on clearance.
- A final payslip that itemises every element above.
- A P9 for the year to date. The year-end deadline is the end of February, but give the leaver theirs with the final dues. They’ll need it for their own return and the next employer may ask for it. See P9 forms for employers.
- The final dues go into the P10 for the month they’re paid. See filing the P10 on iTax.
This is general guidance, not legal advice. If a termination is contested, take advice before paying, because what you pay and how you describe it can affect the case.
You can check the PAYE on a final payment with the PAYE calculator.