Ex gratia payments are goodwill payments made by an employer to their employee in certain circumstances. These payments, often known as “golden handshakes” are entirely voluntary, and an employer is under no obligation to make such a payment.
There are various circumstances where an employee may be offered an ex gratia payment, such as retirement, redundancy or in an unfair dismissal or discrimination case. These payments can have an impact on the employee's rights, and on their tax payments, therefore, employees should get expert legal advice as soon as they become aware that this may be a possibility.
Our specialist Employment Lawyers can explain the implications of ex gratia payments and advise you on the best course of action. Get in touch with our team today.
When are ex gratia payments offered?
Ex gratia payments are a form of gift or voluntary payment and in settlement agreements are made without the employer admitting any liability or guilt. When a settlement agreement is put in place, then there is a legal requirement that the employee has received legal advice on the agreement from an independent legal advisor.
The types of circumstances where an ex gratia payment may be offered are:
Ex gratia payments may be offered as an incentive for the employee to take early retirement. It is possible for this type of payment to be made into a "registered pension scheme", which will make it tax free so long as certain circumstances are met.
In a redundancy situation, the employer can offer an ex gratia payment to avoid having to follow the redundancy process and quickly terminate employment. The employee would also receive statutory redundancy pay.
To avoid an employee suing their employer at an employment tribunal after unfair dismissal, the employer may offer an ex gratia payment as a sign of goodwill.
Ex gratia payments can be made to employees that have suffered discrimination in the workplace. These can result in the termination of employment (in which case they are taxable) or they can not result in the employment being terminated (in which case they are tax-free).
Where the employee is classified as disabled and are protected against discrimination but have failing health and no longer can work even after employer adjustments, an ex gratia payment may be offered in return for their resignation and a signed settlement agreement.
What are the tax implications of an ex gratia payment?
The first £30,000 of an ex-gratia payment are tax free. HMRC still need to be notified of the payment in the relevant tax year, but no deductions will be made. Amounts above £30,000 will be subject to the usual tax deductions.
For pensions, where the payment is made into a "registered pension scheme" the entire payment can be tax free, so long as it forms part of the employee's termination of employment, it is not taxable for another reason (such as pay in lieu of notice), and it was made to benefit the employee under the rules of the pension scheme.
Payments in lieu of notice
Payments in lieu of notice (PILON) that were ex-gratia payments used to be tax free so long as there was no contractual right to a PILON. However, since April 2018 this is no longer the case, and tax must be paid in all cases, whether or not there is a contractual PILON. The sum that is to be taxed is known as the post-employment notice pay (PENP) and is basically equivalent to the salary the employee receives in any unworked period of notice minus the contractual PILON. The balance of the termination if given as an ex gratia payment will be tax-free up to the usual £30,000.
Most settlement agreements will include a tax indemnity clause. This is very normal and means that if HMRC decides tax is due on the ex gratia payment, it will be the employee that is liable to pay it. Generally, there will be a clause stating that any claims made against the employer in relation to tax owed to HMRC by them will have to be reimbursed by the employee.
Contact Our Employment Lawyers for Hertfordshire London and Beyond
Our expert Employment Lawyers can explain to you the implications that any ex gratia payment can have on your employment options as well as for tax purposes. These payments can have various implications and our specialist lawyers can discuss your personal situation to make sure that you follow a route that is best for you.
Please call us on 02082077358 for no-nonsense impartial advice or fill in our online enquiry form for a free no-obligation chat to discuss your individual situation.