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.
“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.
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.
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