The government has cut the tax burden on pensions, a move likely to benefit Kenyans planning for early retirement and those seeking to increase their pension savings.
A Retirement Benefits Authority (RBA) statement says the monthly deductible pension contributions were raised to Sh30,000 from Sh20,000 effective December 27 in significant reforms introduced through Tax Laws Amendments Act, 2024.
“These reforms align tax legislation with the current economic realities, addressing long-standing challenges to promote retirement savings, ease healthcare burdens and empower retirees,’’ RBA CEO, Charles Machira said.
The amendments to the Income Tax Act also increased the deductible contributions from Sh240,000 to Sh360,000 annually, benefiting both individuals and employers.
According to RBA, this change could encourage more workers to enhance their contributions, leading to greater savings and significant tax benefits by raising the non-taxable income associated with pension contributions.
The law change now allows individuals aged 38 years and older to access their pension funds tax-free, provided they have been members of the scheme for at least 20 years.
Before that, only individuals aged 65 and older qualified for tax exemptions on pension payouts. The exemption also extends to withdrawals made before retirement age due to health reasons.
“The exemption from tax also applies to withdrawals from the funds before attaining retirement age due to ill health or after attaining 20 years from the date of registration as a member of the fund,” RBA’s statement reads.
Initially, lump-sum pension payouts for retirees under the age of 65 were taxed on a sliding scale, with the first Sh600,000 being tax-exempt.
The subsequent Sh400,000 was taxed at 10 per cent, followed by Sh400,000 at 15 per cent, and the next Sh400,000 at 20 per cent, with any amount exceeding Sh1.2 million taxed at 25 per cent.
This meant that
a retiree with Sh1.2 million lost at
least Sh300, 000 in taxes.
To address the critical need for
healthcare in retirement, the authority has introduced a tax-deductible
limit of up to Sh15,000 per month for
post-retirement medical funds.
