Severance Pay Tanzania: The Formula, the Exclusions and the Final Pay File

This guide sets out the severance pay Tanzania rules for employers: who qualifies, the formula, each exclusion, how severance sits beside notice pay, leave pay, transport and unfair termination compensation, and how TRA and NSSF treat the payment. It closes with the Zanzibar position and a worked example in Tanzanian shillings.

Who should read this

• Mainland employers preparing a redundancy, a closure or a single termination for capacity or operational reasons.
• Payroll and finance teams who compute final pay and run the PAYE, NSSF, SDL and WCF returns for the exit month.
• HR managers who need to know when severance is not due, and how to document that position.
• Foreign-owned companies whose group policy assumes a different severance formula from the Tanzanian one.
• Employers on Unguja and Pemba, who work under a separate statute covered below.

The procedure that comes before the money is covered in our guides to employee termination in Tanzania and the redundancy procedure.

What the law says: section 42 of Cap. 366

Severance on the Mainland comes from the Employment and Labour Relations Act, Cap. 366. This guide uses the section numbers of the Revised Edition 2019, which the Labour Laws (Amendments) Act No. 4 of 2025 also uses. The same text appears as section 43 in the TanzLII consolidation dated 31 December 2023, so check which edition a document cites before you compare numbers.

The section has four parts. We read them on TanzLII in the 2004 text as enacted and in the 2023 consolidation:

• Section 42(1) defines severance pay as "an amount at least equal to 7 days' basic wage for each completed year of continuous service with that employer up to a maximum of ten years".
• Section 42(2) makes it payable on termination where the employee has completed twelve months' continuous service and the employer terminates the employment.
• Section 42(3) lists the cases where subsection (2) does not apply.
• Section 42(4) says severance does not affect the employee's right to any other amount payable under the Act or any other written law.

Section 4 defines "basic wage" as the part of remuneration paid for work done during the hours ordinarily worked. It excludes allowances, overtime, Sunday and public holiday pay and night work pay. Housing, transport and other allowances therefore stay out of the calculation unless the contract says otherwise.

Act No. 4 of 2025 left section 42 unchanged. It rewrote the compensation for unfair termination in section 40(1)(c) and added section 41A, as reported by Bowmans on 28 March 2025 and Clyde & Co on 30 April 2025. Both changes affect what a wrong severance decision costs.

Who qualifies for severance pay?

Three conditions must all be met under section 42(2):

1. The employee has completed twelve months' continuous service with the employer.
2. The employer terminates the employment. A resignation does not qualify.
3. None of the section 42(3) exclusions applies.

The usual qualifying cases are retrenchment for operational requirements, closure of the business, and termination for incapacity or incompatibility where the employee accepts no alternative post. Section 36(a)(ii) also treats as a termination a resignation forced because the employer made continued employment intolerable. Whether that constructive termination carries severance has to be argued on the facts, so take advice before refusing it.

Continuous service is counted with "that employer". Gaps between contracts, transfers within a group and a sale of the business can each break or preserve continuity. Record the start date and every change of employer entity in the personnel file.

Which terminations carry no severance?

Section 42(3) excludes four situations. Paragraph (c) was added after 2004. The 2023 consolidation shows it, and secondary summaries attribute it to a 2010 miscellaneous amendments Act.

The misconduct exclusion is conditional on fairness. If the Commission for Mediation and Arbitration (CMA) later finds the dismissal unfair, severance becomes due along with any compensation. Our guide to the disciplinary hearing covers the record that keeps the exclusion intact.

Incapacity on its own is not an exclusion. An employee dismissed for ill health or poor performance after twelve months is owed severance unless an alternative post was unreasonably refused. Some secondary summaries list capacity as a standalone exclusion; the statute does not.

For fixed terms, FB Attorneys (25 December 2023) confirms that section 42(3)(c) removes severance on expiry. Our fixed-term contract guide explains when non-renewal still counts as a termination.

How is the severance amount calculated?

The statutory floor is: daily basic wage x 7 x completed years of service, with years capped at ten. Three choices drive the answer, and the Act settles only two of them.

Severance is a floor. Where a contract, policy or collective agreement promises more, the higher figure applies. Where it promises less, the statutory amount still applies, because the Act sets minimum standards.

An employee with nine years and eleven months has nine completed years. An employee with fifteen years is paid for ten. Long service beyond ten years is often rewarded through a contractual gratuity, which is a separate payment.

What else must the final pay include?

Section 44(1) lists everything due on termination. Severance is only one line:

Section 41(5) lets the employer pay remuneration in place of notice. Notice is at least 28 days for monthly paid staff, or longer if the contract says so. Notice cannot run during annual leave under section 41(4).

Section 43 applies where employment ends somewhere other than where the employee was recruited. The employer transports the employee and personal effects, pays for the transport, or pays an allowance of at least a bus fare plus daily subsistence. Our annual leave guide covers leave pay methods.

Is severance payable on top of compensation for unfair termination?

Yes. Section 40(2) states that a compensation order is "in addition to, and not a substitute for, any other amount to which the employee may be entitled in terms of any law or agreement". Section 42(4) says the same from the severance side.

Since March 2025, compensation under section 40(1)(c) falls in bands set by Act No. 4 of 2025, as published in the Special Gazette of 14 March 2025 and hosted on Refworld:

Clyde & Co prints 24 months as the ceiling for the third band. The Act text and Bowmans read 20 months. Compensation is measured in remuneration, which includes allowances, while severance uses basic wage. A disputed misconduct dismissal can therefore cost both, plus notice pay.

Where an arbitrator orders reinstatement and the employer refuses, section 40(3) adds twelve months' wages on top of wages and benefits due. Section 41A, inserted in 2025, allows remuneration for the remaining term where an employer materially breaches a fixed-term contract.

How does severance work in a redundancy?

Retrenchment under section 38 is the main source of severance claims. The employer must consult on the reasons, alternatives, selection, timing and severance before notices go out. The consultation is also where section 42(3)(b) becomes live.

If the employer offers a suitable alternative post and the employee unreasonably refuses it, severance falls away. "Suitable" and "unreasonably" are judged on the facts: pay, grade, location and family circumstances all count. Put the offer in writing, give time to consider it, and minute the reasons for any refusal.

Many retrenchment agreements pay more than the statutory floor, for example a month's basic wage per year. Write the agreed formula into the minutes and the individual letters, so the CMA can see that the floor was met or exceeded.

Is severance pay taxed in Tanzania?

Yes. The Income Tax Act, Cap. 332 R.E. 2023, published by TRA, includes in employment income under section 7(2)(e) any "payment for redundancy or loss or termination of employment". Section 7(3) contains no exclusion for it. The employer withholds PAYE when it pays.

Section 7(4) softens the timing. For calculating tax, a redundancy or termination payment may be allocated equally across the year it is received, or the earlier year employment ceased, and the five years before. TRA's PAYE page describes this as spreading terminal lump sums over six years or the actual years of employment.

The spread helps lower earners most. The resident individual bands run to 30% above TZS 12,000,000 a year (F0181, F0180). An employee who earned above that in each of the prior years stays in the top band, so spreading changes little. An employee on a modest salary may pay noticeably less.

Leave pay and notice pay are ordinary employment income: section 7(2)(a) names "payment in lieu of leave". Auditax International (30 September 2024) gives the same reading of section 7(4). Our PAYE and net salary guide carries the monthly bands.

Do NSSF contributions apply to severance?

The NSSF Act, Cap. 50 R.E. 2023 defines "wages" as remuneration for normal periods of work. The definition expressly includes living allowances and "any payment of wages in lieu of notice of termination of employment". Notice pay is therefore contributory: 20% in total, with the employee share not above 10% (F0279).

Severance is not named in the definition, and it is not pay for a period of work. Our reading is that it is not a contributory wage, but NSSF has not published a ruling we could find. Confirm with NSSF before the exit payroll. Late contributions cost 5% of the unpaid amount for each month or part (F0446).

Two other employer levies sit on payroll. SDL is 3.5% of gross emoluments for employers with ten or more employees (F0276). WCF is 0.5% of gross monthly earnings (F0281). Whether a severance lump sum counts as emoluments or earnings for each is a point to confirm with TRA and WCF.

What is the position in Zanzibar?

Employment is not a Union matter. Cap. 366 applies to Mainland Tanzania only. Employers in Zanzibar follow the Employment Act No. 11 of 2005, published in Legal Supplement No. 6115 of 7 October 2005.

Section 54(4) of the Zanzibar Act refers to a gratuity that an employee who resigns on notice loses. We did not find a section setting its amount in the published text, and we found no consolidated version showing later amendments. Confirm the current rule with the Zanzibar Labour Commissioner before computing final pay on the islands.

Income tax is a Union matter, so PAYE on terminal pay goes to TRA in both places. Social security in Zanzibar runs through its own fund rather than NSSF; check which fund the employee belongs to.

Worked example: a retrenchment in Arusha

This example is hypothetical. A Mainland logistics company with 60 staff retrenches a supervisor in Arusha after a fair consultation. She was recruited in Mbeya and joined on 1 February 2018. Employment ends on 31 October 2026, after eight years and nine months. No alternative post exists.

Her monthly pay is a basic wage of TZS 1,800,000 plus a housing allowance of TZS 300,000, so gross remuneration is TZS 2,100,000. Her contract gives one month's notice, paid in lieu, and twelve days of leave are untaken. The company policy sets a divisor of 30.

Divisor sensitivity. With a divisor of 26, the daily basic wage is TZS 69,231 and severance becomes 56 x 69,231 = TZS 3,876,936 (rounded). Leave pay rises in the same way. The policy wording decides which figure is right.

NSSF. Salary and notice pay are contributory wages: 10% of TZS 4,200,000 is TZS 420,000 from the employee and TZS 420,000 from the employer (F0279). We have left leave pay and severance out pending NSSF confirmation.

PAYE before any section 7(4) allocation. We treat the transport as a reimbursement outside income; confirm with TRA. Taxable pay is 2,100,000 + 2,100,000 + 720,000 + 3,360,000 - 420,000 = TZS 7,860,000. PAYE is 128,000 + 30% x 6,860,000 = TZS 2,186,000 (F0180).

Effect of the spread. Her annual pay of TZS 25,200,000 already sat in the top band in each prior year. Allocating the severance across six years leaves it taxed at 30%, so the PAYE above barely changes. A lower-paid colleague could see a real reduction.

Net cash. 8,360,000 - 420,000 - 2,186,000 = TZS 5,754,000 to the employee. The company also issues a certificate of service on the last day.

If the CMA finds the procedure unfair. Compensation of at least 6 x 2,100,000 = TZS 12,600,000 would be added under section 40(1)(c), on top of the severance. That figure is the business case for a clean consultation file.

What to do now

1. Confirm the ground. Record why the employment is ending and whether any section 42(3) exclusion applies, with the evidence for it.
2. Check service. Take the start date and any change of employer entity from the file and count completed years, capped at ten.
3. Fix the wage base. Separate basic wage from allowances and apply the divisor your contract or policy states.
4. Offer alternatives in writing. In a redundancy or capacity case, put any suitable post in writing and minute the response.
5. Build the section 44 schedule. List salary, leave, notice, severance and transport line by line, with the basis for each.
6. Run tax and contributions. Withhold PAYE, apply section 7(4) where it helps, and confirm the NSSF, SDL and WCF base with each body.
7. Pay and certify. Pay on termination and issue the prescribed certificate of service the same day.
8. Keep the file. Retain the computation, letters and receipts in case of a CMA referral.

Key dates

A CMA referral on Form No. 1 carries no published fee (F0452). Our guide to labour disputes at the CMA explains the process.

How Zatra helps

Zatra computes final pay for each leaver, tests every severance exclusion against the file, and runs PAYE, NSSF, SDL and WCF for the exit month. We also draft the alternative-employment offers and the certificate of service.

Our payroll compliance service handles the computation and returns. The HR consulting service leads on policy wording and the retrenchment file.

Costs come in two separate buckets. Government charges, such as PAYE, levies and contributions, are paid at the official rate to TRA, NSSF and WCF against their own control numbers. Zatra's professional fee is quoted on its own line and never mixed with them. Zatra prepares and files, but does not decide or guarantee any authority's outcome. Representation at the CMA or the Labour Court, active disputes, prosecution and formal legal opinions go to an advocate.

Sources and status

Accurate as at 24 October 2026.

• Employment and Labour Relations Act, 2004 as enacted: TanzLII; ss.4, 35, 36, 40 to 44. Accessed 24 Oct 2026.
• Employment and Labour Relations Act, consolidation of 31 Dec 2023: TanzLII; severance at s.43(3)(c). Accessed 24 Oct 2026.
• Employment and Labour Relations Act, Cap. 366 R.E. 2019: ILO NATLEX; numbering used in this guide. Accessed 21 Oct 2026.
• Labour Laws (Amendments) Act No. 4 of 2025: Special Gazette of 14 Mar 2025, Refworld copy. Accessed 21 Oct 2026.
• Income Tax Act, Cap. 332 R.E. 2023: TRA; ss.3, 7(2), 7(3), 7(4). Accessed 24 Oct 2026.
• TRA: Pay As You Earn: terminal lump sums. Accessed 24 Oct 2026.
• NSSF Act, Cap. 50 R.E. 2023: NSSF; s.2 "wages", s.12. Accessed 24 Oct 2026.
• Zanzibar Employment Act No. 11 of 2005: Legal Supplement No. 6115, 7 Oct 2005. Accessed 24 Oct 2026.
• Zatra fee register lines F0176 to F0181, F0276, F0279, F0281, F0446 and F0452: fees at 26 Sep 2026. Accessed 24 Oct 2026.

Figures to confirm before you act

• Daily divisor: the Act sets none; 30 and 26 are both in use
• Constructive termination: whether a section 36(a)(ii) resignation carries severance
• NSSF base: whether leave pay and severance are contributory wages
• SDL and WCF base: whether a severance lump sum counts as gross emoluments or earnings
• Section 7(4) mechanics: how TRA applies the allocation in a given payroll
• CMA time limits: 30 and 60 days under Rule 10 of GN 64 of 2007
• Section numbers: R.E. 2019 numbering here; the 2023 consolidation is one higher for each section cited
• Zanzibar: any severance or gratuity amount and amendments after 2005

This article is general information based on official sources available at the date of publication. It is not legal, tax or financial advice. Laws and notices change. Verify with the issuing authority or consult Zatra before acting.