What is an ex gratia payment? - Paul Doran Law

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What is an ex gratia payment?

Ex gratia paymentWhat is an ex gratia payment?

‘Ex gratia’ is Latin for ‘out of goodwill’ or ‘by favour’.

Ex gratia payments are sometimes known as ‘golden handshakes’, ‘golden boots’ or ‘golden goodbyes’.

You might be offered an ex gratia payment if:

An ex gratia payment is a gesture of goodwill because your employer isn’t legally obliged to provide it. There’s no limit to how much they can offer you, although your employer might feel constrained because they have to pay National Insurance on any termination payment over £30,000,

In return for accepting the money, you’ll be asked to sign a settlement agreement confirming that you won’t take your employer to court later. (Settlement agreements are known as compromise agreements in Northern Ireland.)

Ex gratia payments and tax

The government funds courtrooms and pays for tribunal judges, so it’s in their interests to avoid such costs.

In order to save these expenses, and reduce the likelihood of claims going to court, the government introduced a tax break on ex gratia payments meaning that the first £30,000 is free of tax and National Insurance.

When you do your tax return, you will have to tell HMRC that you’ve received an ex gratia payment. Tell your accountant or tick the ‘ex gratia’ box on the form.

You’ll have to pay tax and NI on your salary, notice, commissions or other benefits as usual while you’re working, as well as on any ex gratia payment above £30,000 and on any compensation you receive.

To reduce tax if you’re being offered more than £30,000, we could negotiate for your employer to put some or all the excess towards your legal costs.

If ex gratia payments are mentioned in your contract or are part of your employer’s established routine, there’s a risk that HMRC will see it as an entitlement rather than as a goodwill gesture.

To get round this, we could negotiate for the ex gratia payment to be made direct to your pension fund. This idea works best if you’re nearing retirement age, because the money will be tied up and difficult to access.

Don’t panic if you see a tax indemnity clause in your settlement agreement, stating that you are “liable to account to HMRC and/or the employer for any unpaid tax”.

It’s a traditional clause which is there just in case the Chancellor ever changes the tax laws to make ex gratia payments taxable. However, tax laws are never implemented retrospectively, so it’s exceedingly unlikely that the clause will be applied.

Are you facing redundancy?

In a settlement agreement, any statutory redundancy pay and any lump sum can be made into an ex gratia payment.

It’s likely that you and your employer will want the redundancy to proceed as quickly as possible.

This is why they may offer you an ex gratia payment on top of any statutory redundancy pay you’re entitled to – it’s usually equivalent to one month’s pay.

You may still get a month’s worth of salary as a redundancy ex gratia payment even if you have less than two years’ employment (meaning you don’t legally have any unfair dismissal rights and can’t complain if the redundancy process is unfair).

Note that contractual notice pay is taxable but the first £30,000 of redundancy pay is tax-free (including any ex gratia element).

It is important to have these (and many other) details stated absolutely clearly in the written settlement agreement.

Making a discrimination claim?

On the subject of tax…

If you win a discrimination claim, you might be offered compensation for injury to feelings. If your case is especially serious, you might also also be offered damages for psychiatric damage or personal injury.

There is a relatively new kind of tax exclusion called the ‘Disability Exemption’ which applies if you receive compensation for impairments caused by a psychiatric injury (this is distinct from compensation for injured feelings, unless they amount to a psychiatric injury).

It means you get total tax exemption for termination payments made because of your disability or injury where it prevents you from fulfilling your employment duties.

What this means to you

It’s important to get expert legal advice about whether to accept an ex gratia payment. That’s where we can help. We are employment lawyers who only ever act for employees, never for employers.

If you make a claim for unfair dismissal or discrimination, for example, we may be able to help you negotiate an ex gratia payment on top of the legal minimum your employer would have to pay.

As you can see, it’s a complex situation, and you’ll benefit from having an expert on your side. Give us a call and we’ll explain the legal and tax implications.

Related reading

If you found this information useful, you might also like to read other articles on similar subjects:

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