An ex-gratia payment is an amount of money that you would receive by your employer as a termination payment when you have left your employment or as a non-contractual payment as compensation for loss of office. Such a payment is over and above what you are entitled to be paid under your contract of employment, so for example, it would not include your notice or holiday pay.
An ex-gratia payment therefore usually represents a “good will” sum without any obligation by your employer to pay this. The key feature of an ex-gratia payment, therefore, is that there is no contractual obligation placed on the employer to make it to the employee. Moreover, unlike with statutory redundancy pay, there is no limit on how much an ex-gratia payment can be.
However in the context of disputes, such as claims for unfair dismissal, performance improvement plans, or discrimination, the payment may arise as a result of a negotiated settlement. In these circumstances, it would not, of course, originally have been contemplated by your employer.
Usually, especially against the backdrop of a dispute, you would be expected to sign a settlement agreement to receive the ex-gratia payment. This is a document which makes it binding that in return for the payment, you will not bring any claim against your employer. Even where there is no dispute, your employer may ask you to sign a settlement agreement as a safeguard, for example, where enhanced redundancy payments are being made.
Tax-treatment
The first £30,000 of compensation for loss of office on genuine ex gratia payments is tax-free. To qualify for the exemption, there must be no contractual right to the payment and it must not be in lieu of notice.
An individual was dismissed from his employment in 1996. His contract of employment had provided that his employer ‘may make a payment in lieu of notice to the employee’. He took proceedings against his former employer, claiming damages for unfair dismissal and breach of contract.
The court held that the contract had given the employer the discretion to make a payment in lieu of notice, but had not required it to do so, so that the claim had been for wrongful dismissal. Wilson v Clayton CA 2004, 77 TC 1
A woman began employment with a company in January 2005. In April 2005 the company asked her to leave and subsequently paid her £17,971 from which it deducted tax. The woman filled in her self-assessment tax return, treating this sum as non-taxable. HMRC issued a notice of amendment and the taxpayer appealed. The First-Tier Tribunal dismissed her appeal, holding that it was a taxable emolument since it had been paid in accordance with her contract of employment. Ms L Cornell v HMRC FTT [2009] UKFTT 140 (TC).
How easy is it to negotiate an ex-gratia payment?
This will largely depend on the nature of your employment and/or any dispute that you have with your employer. You should not look at it as an entitlement, because this is not the case. There could be a moral case for such a payment or a legal case.
The Inland Revenue have explained on their website how the tax treatments of ex gratia payments work, together with further guidance here.
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