What is an “ex-gratia payment”?
An ex gratia payment is a payment made by an employer where there is no contractual obligation to do so.
Ex gratia translates to ‘by favour’ and literally means a voluntary payment or a gift. In Settlement Agreements these payments indicate a sum that is paid without admission of liability by the employer and the use of the term ‘ex-gratia’ specifies to each party that the employer does not consider that they are under an duty to provide this amount.
Are ex gratia payments taxable?
Payments that are made between an employer and employee are normally subject to tax as they will be described as ‘arising out of the contract of employment’ by HMRC. Ex-gratia payments are an exception to that rule and fall under a tax exemption from s.403 Income Tax (Earnings and Pensions) Act 2003 for any amounts under £30,000.00. This is because the payments made are not made for the work that has been undertaken or for a provision of services; they are a “voluntary” payment made by the employer.
Any ex-gratia payment over £30,000.00 should be reported to the Inland Revenue to ensure that there will be no unexpected tax liability in the coming year. Ex-gratia payments and statutory redundancy payments will be paid free of tax. Payment in lieu of notice, holiday pay and normal contractual pay will be subject to tax and national insurance even when they are paid via a Settlement Agreement.
Can our settlement agreement solicitors help?
Take a look at our settlement agreements page: we can help you and often your employer will pay the fee.