If you have money in a pension scheme, provident fund or NSSF, the tax on taking it out changed from July 2025. The old system of tax-free amounts and a banded table for lump sums was removed. The new system is simpler for people who wait, and heavier for people who withdraw early. This article explains what the law now says, in plain terms. It reflects the Income Tax Act as consolidated in mid-2026, so check for later changes.

What was removed

Before July 2025, the Act set tax-free amounts for lump sums and the first part of a payout, and applied a graduated table for the balance. Those provisions (sections 8(4) and 8(5)) were deleted by the Finance Act 2025. The old table still matters if you are looking at a payment made before the change, and the pension lump sum tax calculator applies the earlier table when you choose an earlier date.

What is exempt now

The Second Schedule to the Act exempts payments of pension benefits from a registered pension fund, provident fund, individual retirement fund, public pension scheme or the National Social Security Fund in these situations:

  • On reaching retirement age as set by the rules of the fund or scheme
  • Gratuity, other allowances paid under the scheme and retirement annuities
  • Withdrawal before retirement age because of ill health
  • Withdrawal after twenty years from the date of joining the fund
  • Benefits arising on death

If your payout falls in one of these groups, no income tax is due on it. That is a significant benefit for members who stay invested until retirement or for twenty years.

What is taxed: early withdrawals

A withdrawal made before twenty years from the date of joining the fund, and not on retirement or for ill health, is subject to withholding tax at the resident rates in the Third Schedule:

Slice of the withdrawal Rate
First KES 288,000 10%
Next KES 100,000 25%
Everything above KES 388,000 30%

The scheme withholds the tax and pays it to KRA. The earlier tax-free amounts that used to come first no longer exist, so the whole withdrawal is taxed through the bands. A member taking KES 1,000,000 early would bear KES 28,800 on the first slice, KES 25,000 on the next and KES 183,600 on the rest, a total of KES 237,400. Test your own number in the pension lump sum tax calculator.

Surplus funds

Surplus funds withdrawn by an employer from a registered fund are taxed at 30 percent of the gross sum under the same schedule. This affects employers, not members.

How it affects planning

  1. Time your exit. If you are close to the twenty-year mark or to retirement age, waiting can turn a taxed withdrawal into an exempt one. Check your joining date on the scheme records.
  2. Think twice about early withdrawals. They are taxed at up to 30 percent and lose years of tax-free growth. Consider a loan against the scheme, where allowed, or a transfer to a new employer's fund instead.
  3. Transfers are not withdrawals. Moving your benefits from one registered scheme to another is not a withdrawal and is not taxed. Ask the schemes for the transfer procedure.
  4. Contributions still reduce tax. Your contributions to a registered scheme are deductible up to the monthly limit, which is now KES 30,000. See pension contributions and tax relief for employees.
  5. Check NSSF. NSSF benefits follow the same exemption on retirement age and ill-health, so ask NSSF what applies before you claim. See NSSF contributions explained.

When you leave a job

Leavers often ask for their pension at exit. If you are not at retirement age and have not reached twenty years, the payout is an early withdrawal and the tax above applies. Other terminal dues are taxed separately through PAYE: use the terminal dues tax calculator, and read what you are owed when you resign and how redundancy and severance pay are taxed. Budget for the whole package with the severance and terminal dues workbook.

What to ask your scheme

  • Date of joining and the twenty-year date
  • Whether you qualify as retirement age under the rules
  • The tax they will withhold, in writing
  • A tax withholding certificate for your records

Keep the certificate with your tax records. If you think too much was withheld, claim the difference on your annual return: how to claim a PAYE refund.

A caution

Finance Acts change the details often, and the rules on schemes, transfers and the definition of retirement age are technical. Treat this as an overview and confirm with your scheme administrator, the Retirement Benefits Authority or KRA before acting.

Compare the scheme payout with your other income in the annual income tax estimator, and use the PAYE calculator to see how a large payment in one month affects your tax if it is added to pay.

Frequently asked questions

Are lump sums taken at retirement taxed at all now? Under the exemption for payments at retirement age, they are not taxed, provided the fund is registered and the retirement conditions are met.

Does the 20-year rule apply to a new employer's fund? It runs from the date you joined the particular fund. If you move funds, ask how the date is treated for the receiving scheme.

Who pays the withholding tax? The scheme deducts it from your payout and remits it to KRA. You do not pay it separately.

Can I get the withheld tax back? If the correct tax was withheld, no. If an exemption should have applied or too much was taken, claim the difference on your return.