Getting a bonus is good news until the payslip arrives and the amount looks much smaller than promised. The reason is simple: a bonus is not taxed separately at a flat rate. It is added to your pay in the month you receive it and taxed at your highest rate.

Why a bonus is taxed more heavily

PAYE is charged in bands, with each slice of income taxed at a higher rate. Your normal salary fills the lower bands. A bonus lands on top, so it falls in the highest band you have already reached, which is often 30% or more. On a monthly salary of KES 100,000, extra income is taxed at 30%, not at the average rate shown on your payslip.

Statutory deductions apply as well. NSSF is capped, so a bonus may not raise it if you are already at the limit. SHIF at 2.75% and the Housing Levy at 1.5% are calculated on gross pay, so they rise with the bonus, and since 27 December 2024 both reduce taxable pay.

A worked example

Say you earn KES 100,000 and receive a bonus of KES 50,000 in the same month.

  • SHIF on the bonus: 2.75% of 50,000 = KES 1,375
  • Housing Levy on the bonus: 1.5% of 50,000 = KES 750
  • Taxable extra pay: 50,000 less 2,125 = KES 47,875
  • PAYE on the extra pay at 30%: about KES 14,363

You keep roughly KES 33,500 of the KES 50,000, about two thirds. Put your own numbers into the bonus tax calculator to see the split between tax and deductions.

Commission and overtime

Commission is taxed in the same way, as income of the month it is paid. Overtime too. Paying commission on time and recording it accurately matters; the sales commission calculator and tracker helps employers apply the rules, and the overtime cost and approval tracker keeps overtime separate. Overtime is paid at 1.5 times the hourly rate on normal days and double on rest days and holidays; see overtime pay rules and tax in Kenya.

Can you reduce the tax on a bonus?

Some legitimate options exist, though none is a trick:

  • Pension contributions. Contributing part of a bonus to a registered pension scheme can reduce taxable pay within the allowed limit. See pension contributions and tax relief.
  • Insurance premiums. If you pay for a qualifying policy you may claim relief; see how to claim insurance relief.
  • Timing. Spreading a bonus over several months can keep more of it out of the highest band, but only if your employer agrees and the rules allow it.

Plan with the net, not the gross

When you are promised a bonus, ask whether the figure is gross or net, then work out what you will keep before you commit to a purchase. The net to gross calculator works backwards if you know the take-home amount you need, and our guide on gross pay versus net pay explains how to negotiate with the deductions in mind.

For employers

Pay the bonus through payroll and show it as a separate line on the payslip. The payslip generator workbook has lines for bonuses, and the monthly payroll workbook adds the statutory deductions automatically.

Rates and limits change with each Finance Act, so confirm the current figures with KRA before relying on an example.