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William Laughton
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Ex Gratia Payments in Settlement Agreements: A Guide

What are Ex Gratia Payments?

When applying the Latin term to ex gratia payments, it essentially means a payment done out of goodwill. In such circumstances, the employer will pay an amount without admitting liability. Furthermore, by labelling sums this way, the employer is highlighting they believe they’re under no legal obligation to make payment.

What is the Meaning of Ex Gratia?

The Ex gratia meaning comes from a Latin term which translates to “by favour”. This means something is given voluntarily and out of kindness without a legal obligation or liability.

Ex Gratia Payments to Employees – How are These Offered?

Employers could offer employees ex gratia payments in several ways. Despite this, common terminology is generally used before making one. For example, an employer might:

  • Tell an employee that they’re about to make a “without prejudice” offer
  • Explain that they’re offering a “severance package” (also known as an exit package)
  • Inform an employee that they want to have a “protected conversation”

Also, the employer could make an offer orally or in writing. However, requesting the offer in writing is advisable if the employer hasn’t done so already. This is because it will provide the employee with a greater understanding of the offer made and proof of it.

Why Might Your Employer Offer Such a Payment?

There are several reasons why an employer could offer an ex gratia payment. For starters, they may offer one to avoid potential claims concerning unfair dismissal or discrimination in the workplace. Alternatively, they might offer ex gratia termination payments if they’re planning redundancies and want to avoid the processes involved. Furthermore, they could offer one to incentivise an employee to take retirement early.

Can I Arrange for Ex Gratia Payments in my Settlement Agreement?

Such payments are usually part of an agreement to settle a matter, whether to prevent legal proceedings, manoeuvre redundancy processes or retire early. As such, either party could bring up ex gratia payments as part of the settlement.

How Do I Negotiate an Ex Gratia Payment?

A few things need to be remembered when negotiating an ex gratia payment as part of a settlement agreement. Firstly, don’t resign before negotiations, as this can significantly impact one’s bargaining power and the amount of compensation obtainable

Furthermore, such payments are “by favour”, meaning employers will only pay enough to settle the matter. Although it’s important to negotiate a reasonable sum, becoming hostile with an employer could negatively impact the amount offered.

Moreover, it’s paramount not to threaten to go to an employment tribunal unless stated during “without prejudice” correspondence. This is because a tribunal could amount such actions to breaching “the relationship of trust and confidence”, making a dismissal potentially justifiable.

Among other things, the employee must carefully consider the amount they negotiate. On one hand, they don’t want to push for an unrealistic sum that is unattainable. At the same time, it’s important not to begin negotiations with a figure too low, which could get knocked down.

Finally, one must consider factors like the effects of tax and possible leverage to obtain an optimal settlement agreement. We will discuss these elements in more detail below, but if you would like help negotiating a settlement agreement, contact us now.

What Leverage Do I Have to Negotiate?

An employee could utilise many ploys to secure an ex gratia payment. For example, they could offer to:

  • Not make a subject access request
  • Withdraw their plans to make a formal grievance
  • Not bring the employer before an employment tribunal
  • End their employment smoothly
  • Sign a confidentiality clause preventing them from taking company secrets public

It’s a good idea not to offer everything at once. This is because holding back on what an employee offers can help progress and improve their settlement agreement.

This is Payment Taxable? Can it Be Tax-Free?

The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) outlines that taxation of ex gratia payments occurs if the figure amounts to £30,000 or more.

Unlike regular payments from an employer, which are taxable as part of the employment contract, ex gratia payments have exemptions. Under section 403 of the ITEPA, ex gratia payments below £30,000 are tax-exempt. Therefore, no income tax will be deducted from figures below £30,000.

Do I Have to Pay Tax on Ex Gratia Payments Over £30,000?

As stated above, ex gratia payments of £30,000 or more are taxable. Income tax will be deducted from such amounts; however, National Insurance will only be payable by the employer, not the employee.

HMRC & Ex Gratia Payments – what do you need to do?

Since April 2018, receiving payment in lieu of notice has no longer been possible as part of a tax-free settlement agreement. This includes arranging for notice pay to be paid ex gratia. Therefore, scenarios may arise where HMRC dispute the status of a payment made. In such circumstances, the employee should seek specialist tax advice to understand how to proceed correctly.

Am I Entitled to an Ex Gratia Payment if I am Made Redundant?

If an employee is made redundant, they could receive an ex gratia payment. In such circumstances, the employer would make the statutory redundancy pay and any lump sum offered into such a payment. However, the combined sum must be under £30,000 to be tax-free. Anything over would be taxed like regular ex-gratia payments.

Why Would Your Employer Want to Pay a Redundancy Ex Gratia Payment?

Employers may opt to pay out for redundancies as part of ex gratia payments because they:

  • Save time by avoiding redundancy consultation processes
  • Terminate the employee’s contract of employment more swiftly
  • Limit liability, ensuring unfair dismissal claims don’t arise

Can I get an Ex Gratia Redundancy Payment Even if I am not Employed by my Employer for Two Years or More?

It’s generally more common for employers to offer ex gratia redundancy payments to employees with two or more years of employment. That said, we’ve helped several clients secure ex gratia payments without two years of employment. Therefore, if an employee is unsure of their position, they could contact us to learn more.

Can I be Paid a Tax-Free Ex Gratia Payment if I Have Been Discriminated Against?

Ex gratia payments concerning discrimination could be exempt from tax, depending on the circumstances. Should the payment related to discrimination be unconnected with the termination of employment, it will be tax-free. However, if the discrimination is linked to the dismissal, the ex gratia payment will be subject to the tax rules discussed earlier.

Can I Pay my Ex Gratia Payment into my Pension?

Ex gratia payments can be paid into an employee’s pension, which can provide tax benefits. This is because, under section 408 of the ITEPA, pension payments are tax-exempt if they satisfy specific criteria. Therefore, if an employee is paid £30,000 or more, they could put the taxable amount into their pension to remain tax-exempt.

If you have any questions concerning ex gratia payments or want help acquiring one, contact us today. We are employment law specialists and can assist you through the legal process if eligible. Get in touch with us now by:

About Author

William Laughton

William is a senior copywriter at Redmans Solicitors. Having studied law, he went on to pursue a career in legal writing. He writes about all areas of the employment law sector, including employment tribunals, well-being and human resources. Outside of work, William loves all things sports and fitness.

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