A common belief in Kenyan workplaces is that bonuses, overtime, and commissions are taxed at some special flat rate — or even that overtime is tax-free. Neither is true. KRA does not have a separate tax category for "bonus income." All employment income — however it is labelled on your payslip — is subject to PAYE under the same progressive bands used for your regular salary. What changes is the amount landing in a given month, and that is where the sting comes from.
How Bonuses Are Actually Taxed
When your employer pays you a bonus, they add it to your regular salary for that month and calculate PAYE on the combined figure. There is no separate calculation, no withholding tax, no flat rate — just the normal PAYE process applied to a larger number.
The problem is that Kenya's PAYE system uses progressive bands. The first KES 24,000 of monthly taxable income is taxed at 10%, the next slice at 25%, and everything above KES 32,333 at 30% (with higher bands at 32.5% and 35% for very high earners). In a normal month, your income may sit comfortably in the lower bands. In a bonus month, the extra amount gets stacked on top — and almost always lands squarely in the 30% band. That is why the effective tax rate on your bonus feels so high.
A Worked Example: The December Bonus Effect
Let's say you earn KES 60,000 gross per month. In a regular month, your PAYE works out to roughly KES 11,000 after personal relief. Then December comes and your employer pays a KES 50,000 performance bonus on top of your normal salary.
Your December income is now KES 110,000. Here is how PAYE is calculated on that combined figure:
| Band (KES/month) | Amount in Band | Rate | Tax |
|---|---|---|---|
| 0 – 24,000 | 24,000 | 10% | KES 2,400 |
| 24,001 – 32,333 | 8,333 | 25% | KES 2,083 |
| 32,334 – 110,000 | 77,667 | 30% | KES 23,300 |
| Gross PAYE | KES 27,783 | ||
| Less: Personal Relief | − KES 2,400 | ||
| Net PAYE (December) | KES 25,383 | ||
Compare that to a normal month where PAYE on KES 60,000 is around KES 11,000. The difference is roughly KES 14,383 — and that is the extra PAYE that comes out of your KES 50,000 bonus. In other words, you are losing nearly KES 14,400 of that bonus to tax, which is an effective rate of about 29% on the bonus amount alone. The higher the bonus relative to your regular salary, the more of it lands in the 30% band, and the harder it hits.
For someone in the 30% band receiving a KES 100,000 bonus, expect to net somewhere between KES 68,000 and KES 72,000 after PAYE — depending on exact salary level and other deductions. The gross is never the net.
Enter your normal salary plus the bonus amount to see exactly what lands in your account after PAYE.
PAYE Calculator →What About Overtime?
Overtime is taxed exactly like regular salary — added to the month's total pay and PAYE applied on the combined amount. There is a widespread belief in Kenyan workplaces that overtime is tax-free. It is not. This misconception may have started because some employees doing occasional, low-value overtime do not notice any change — but that is because their total income for the month stays within the same tax band. The moment overtime pushes you into a higher band, you feel it.
If your overtime earnings are substantial — for example, you are in manufacturing or hospitality and regularly work double shifts — it is worth factoring the extra PAYE into your expectations for take-home pay. What looks like a 10% overtime premium on your hourly rate can become 6–7% in your pocket once the tax bands are applied.
Commissions: Same Rule, Different Pattern
Sales professionals in Kenya often have most of their income coming from commissions rather than a fixed base salary. KRA's position is clear: commissions are employment income and are subject to PAYE under the same bands.
For someone with a very small base salary (say, KES 15,000) and highly variable commissions, the month-to-month PAYE can swing dramatically. A quiet month might see minimal tax; a strong month with KES 200,000 in commissions will push a large portion of that income into the 30% band. There is no smoothing mechanism — each month is taxed on its own.
If you are a commission-only earner with no employer, the picture is different: you would be filing under the self-employment income category and paying tax on an annual basis rather than monthly. But if you have an employment contract and your employer is paying you commissions as part of your remuneration, PAYE applies.
The 13th Cheque
A "13th cheque" — the practice of paying an extra month's salary, usually in December — is treated the same way as any other bonus: added to December's regular salary and PAYE calculated on the combined total. Some employers have figured out that splitting the 13th cheque payment across a few months (or paying part in November and part in December) can reduce the monthly spike in taxable income, keeping more of the total in lower bands. Whether your employer does this is entirely up to them — it is a payroll structuring choice, not a legal obligation.
How Allowances Are Taxed
Allowances are an area where the rules are more nuanced. Not all allowances are fully taxable — some have exemptions, others have partial exemptions, and some are fully included in your taxable income. Here is a summary:
| Allowance Type | Tax Treatment |
|---|---|
| Transport allowance | Exempt up to KES 2,000/month; balance is taxable |
| Housing allowance (cash) | Fully taxable — added to gross income |
| Medical allowance (cash) | Taxable; only actual medical reimbursements with receipts may be excluded |
| Per diems / travel reimbursements | Exempt if reimbursing actual documented expenses; otherwise taxable |
| Hardship allowance | 10% of basic salary is exempt for qualifying hardship areas; balance is taxable |
| Airtime / data allowance | Taxable unless it is a reimbursement of business-use expenses with evidence |
The key distinction with allowances is cash versus reimbursement. If your employer gives you a fixed monthly amount — say, KES 5,000 for transport — that is a cash allowance and PAYE applies on anything above KES 2,000. If instead your employer reimburses actual transport receipts you submit, those reimbursements may be excluded from your taxable income. The difference matters a great deal, and many employees are unaware that their cash allowances are inflating their PAYE bill.
Benefits in Kind
A company car, employer-provided housing, a subsidised staff loan, or a generous phone plan are all considered benefits in kind under Kenyan tax law. KRA has prescribed values for the most common ones — a company car, for example, is valued at 2% of its cost per month and added to your taxable income. Employer-provided housing is valued at 15% of your employment income (or the actual rent, whichever is higher) and added to the tax calculation.
In practice, many employees in middle-income roles have a company car or housing benefit and find that their taxable income — as shown on their PAYE certificate — is significantly higher than their take-home pay would suggest. If your payslip shows a large PAYE deduction that seems inconsistent with your basic salary, benefits in kind are often the reason.
Gratuity and Leaving Payments
When employment ends — whether through resignation, retrenchment, or retirement — the lump sum payment you receive may have a tax exemption. The rules depend on what is being paid:
- Gratuity (on retirement or retrenchment): The first KES 300,000 is exempt from PAYE. Any amount above that is taxed as normal employment income in the year it is received.
- Severance / leaving payment: Same treatment — first KES 300,000 is exempt, the balance is taxable.
- Pension from a registered scheme: Payouts from a KRA-registered pension fund are fully tax-exempt. This is one of the strongest arguments for contributing to a registered pension scheme rather than keeping savings in a personal account.
If you are approaching retirement or negotiating a retrenchment package, the KES 300,000 exemption is worth understanding — it can meaningfully change the net amount you walk away with.
Enter your normal salary plus the bonus amount to see exactly what lands in your account after PAYE.
PAYE Calculator →The Bottom Line
Bonuses, overtime, commissions, and most allowances are all taxed under the same PAYE rules as your regular salary. There is no special rate, no exemption for working extra hours, and no way around the fact that a large payout in a single month will be taxed at the top end of the progressive bands.
What you can do is go in with eyes open. Before your bonus month, run the numbers — add your expected bonus to your regular salary and see what PAYE will look like on the combined figure. That way the M-Pesa notification is not a surprise. If your employer is flexible about timing, a payment split across two months can sometimes reduce the overall tax hit by keeping income in lower bands for longer. And if you are receiving cash allowances, it is worth checking with your payroll team whether any of them qualify for the exemptions above — the transport allowance exclusion is one that many employees never claim simply because they do not know it exists.
The gross on your offer letter is not the number that buys groceries. But once you understand exactly how PAYE stacks against bonus income, at least you know what to expect when December rolls around.