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.

What that means is it’s a sum of money paid to an employee by an employer in a situation where the employer is not obligated to do so. Ex gratia payments are gestures of goodwill on behalf of the employer. Such a payment is also referred to as a golden handshake. 

These payments are commonly made in a retirement, redundancy and dismissal scenario. 
The key feature of an ex gratia payment 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.

“Ex gratia translates to ‘by favour’ and literally means a voluntary payment or a gift.”

Some examples of ex-gratia payments:

  • British Airways frequently pay their customers ex-gratia payments following an inconvenience such as a late flight. They do this to maintain good customer relations.
  • After many years of service an employer may offer an ex gratia payment to an employee to encourage them to retire early. It’s a goodwill gesture to an employee but can also be to the employer’s advantage where they need to reduce running costs.
  • Instead of following the redundancy process, an employer can offer an ex gratia payment and quickly terminate employment. The employee would also receive statutory redundancy pay.
This list is only a small example of ex-gratia payments. They may also be made in situations like unfair dismissal, discrimination or injury (to avoid charges being made against the company).

As a general rule, the first £30,000 of such payments can be paid free of tax and NICs however this is not always the case. Please seek legal advice for a full understanding of when this applies.

If you would like to discuss what impact a large payment being made from your business may have, do not hesitate to get in touch.
This post is purely for invoking thought and is not advice. If you are considering making an ex-gratia payment, we suggest you seek legal advice for a full understanding. 

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