When an employment contract terminates in Kenya, employers must manage the exit process with strict adherence to local statutes. Knowing how to calculate final dues in Kenya is essential for avoiding costly labour disputes in the Employment and Labour Relations Court. Under the Employment Act Cap 226 of the Laws of Kenya, final dues consist of several distinct parts. Employers must compute each element separately, apply statutory deductions like PAYE, SHIF at 2.75%, and AHL at 1.5%, and remit these payments by the 9th day of the following month. This process is a vital part of structured employee termination in Kenya.
The final payout is not a single lump sum calculated at random. Instead, it consists of distinct components that depend on the reason for termination, whether it is resignation, redundancy, summary dismissal, or retirement. Each component must be computed separately before applying statutory deductions such as Pay As You Earn (PAYE), Social Health Insurance Fund (SHIF) contributions, and the Affordable Housing Levy (AHL).
The Statutory Formula: How to Calculate Final Dues in Kenya
To calculate the total payout accurately, employers must evaluate five primary components. Each component is subject to specific legal provisions under the Kenya Law statutes.
1. Prorated Salary for Days Worked
An employee is entitled to receive full pay for the days they worked during their final month of employment. To calculate this prorated salary, divide the employee's monthly gross salary by the total number of working days in that specific month, then multiply the result by the actual days worked. For example, if an employee earns 150,000 KES gross and works for 10 days in a month that has 22 working days, their prorated gross salary is 68,181.82 KES.
2. Accrued and Untaken Leave Days
According to Section 28 of the Employment Act Cap 226, an employee is entitled to at least 21 working days of fully paid annual leave after every twelve consecutive months of service. If an employee leaves the organisation before utilizing their accrued leave, the employer must pay them for those untaken days. The cash equivalent of accrued leave is calculated by dividing the monthly basic salary by 26, which is the standard number of working days in a month under Kenyan labour guidelines, and multiplying by the number of accrued leave days. For more details on leave accrual, read our comprehensive guide on employee leave and benefits in Kenya.
3. Payment in Lieu of Notice
Section 36 of the Employment Act allows either party to terminate the contract by paying the other party the salary equivalent to the notice period. If you terminate an employee immediately without allowing them to serve their notice period, you must pay them their full salary for that period. Conversely, if an employee resigns without notice, they must pay the employer the equivalent amount, unless the employer waives this requirement. This payment is typically based on the basic salary.
4. Severance Pay in Redundancy Cases
Severance pay is only mandatory in cases of redundancy under Section 40(1)(g) of the Employment Act. It is not paid during normal resignations or lawful summary dismissals. The law requires employers to pay a minimum of 15 days' basic wages for every completed year of service. If an employee has worked for five years, they are entitled to 75 days of basic wages as severance pay.
5. Gratuity or Pension Benefits
Where an employee is on a fixed-term contract that provides for gratuity, or where a Collective Bargaining Agreement defines gratuity terms, the employer must calculate this benefit. Gratuity is usually a percentage of the basic salary earned over the contract period. This is separate from normal pension contributions made to the National Social Security Fund (NSSF).
Deductions and Taxes to Apply on Final Dues in 2026
Once you have calculated the gross terminal dues, you must apply statutory deductions. Kenyan law requires employers to deduct taxes and statutory contributions from terminal dues, except for specific exempt portions like certain redundancy severance packages up to statutory limits.
For the current 2026 payroll year, the following deductions apply:
- PAYE: Apply the standard progressive tax bands to the taxable portion of the final dues. This includes the prorated salary, notice pay, and payment for accrued leave. You can find the detailed tax bands in our guide on PAYE in Kenya. You can also manage these complex tax calculations efficiently by using professional payroll processing services in Kenya to ensure complete accuracy.
- Social Health Insurance Fund (SHIF): Deduct the mandatory 2.75% of the gross salary from the employee's final month earnings. This deduction is paid to the Social Health Authority. For more information, read our guide on SHIF Kenya 2026 rates.
- Affordable Housing Levy (AHL): Both the employer and the employee must contribute 1.5% of the employee's gross monthly income towards the housing levy, as detailed in our Affordable Housing Levy (AHL) guide.
- NSSF: Deduct the statutory NSSF Tier I and Tier II contributions based on the current 2026 pensionable earnings limits. Learn how these limits affect your final payroll computations in our NSSF Kenya 2026 guide.
All statutory deductions must be declared and paid to the Kenya Revenue Authority and other relevant authorities by the 9th day of the following month to avoid heavy penalties.
Compliance Requirements and Best Practices
Under Section 51 of the Employment Act, employers must issue a Certificate of Service to the departing employee on the last day of employment. This certificate must state the name of the employer, the name of the employee, the date employment started, and the date it ended. It must also describe the nature of the work performed.
Managing terminal benefits requires strict compliance to avoid costly litigation. Many foreign companies and NGOs operating in Kenya find it beneficial to work with an experienced HR outsourcing partner in Kenya to handle these sensitive transitions smoothly.
