Ex gratia payment
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If you’re unsure how much your ex gratia payment should be, try the free Compromise Calculator whereby you fill in a form and we assess your case for free, on a first come first served basis. To get an idea of how we work this out, we have laid out the basics on the How Much Money Should I Get page. Alternatively give us a call on 0800 533 5134, email info@compromiseagree.com or request a call-back to the bottom right.
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‘Ex gratia’ is the Latin for ‘as a favour’. In compromise agreements, this means that it is a payment which your employer is not obliged to make under your contract of employment. Because it is a non contractual payment, it is tax free (up to 30,000). The reason that this tax break exists is as follows.
The state funds employment tribunals, including paying for the judges and the courtrooms etc: this is expensive. In the mid nineties, the government decided to introduce tax breaks for compromise asgreements in order to encourage people to settle their disputes early and out of court. This is why the first 30,000 is often tax free.
Any statutory redundancy pay and any lump sum can be made into an ex gratia payment in a compromise agreement. There is no obligation to give an ex gratia payment, but it is very common to do so because both sides want to bring the employment to an end.
In relation to any sums over 30,000, the tax-free status is more tricky. The easiest way to not pay tax on any amount over 30k is to pay it into a pension. Unfortunately this may lock in most of the capital, and so may be favoured more if you are nearing your retirement. See our article called Pension Contributions.
In discrimination cases, it is theoretically possible for an employer to pay an amount as damages for discrimination, and this is regarded by HMRC as tax free. The problem here is that employers don’t want to make admissions of guilt, and therefore such a compromise agreement structure would take careful wording by an expert legal adviser.
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Another tricky area is in relation to notice period. If your contract entitles you to say one month’s notice, then your employer can structure a compromise agreement so that you effectively receive this tax free. They can say ‘we are terminating your employment without notice’, thus technically breaching your contract, and then pay you an ex gratia payment instead. Again, many employers shy away from this and decide to tax at source the sum equivalent to any notice pay.
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The exception to this rule is where you have a mandatory ‘payment in lieu of notice’, or ‘PILON’ clause. In this situation, you are entitled to receive payment instead of being asked to work out your notice period. Therefore your employer can’t pay your notice pay ‘ex gratia’ because you are entitled to it under the contract, rather than receiving is as a favour. There is more about this technical area on our Payment in Lieu of Notice page.
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Unfortunately, a lot of employers are paranoid about tax liabilities and are often unwilling to structure your pay-out in a tax efficient way just in case it leaves them exposed. You will find that if you represent yourself it could be difficult to approach your HR department with the right technical knowledge and the air of confidence required to convince them to structure your compromise agreement in a way which leaves you and the employer better off rather than the taxman.
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You can see a few examples of how we helped employees on the Employee Experiences page. It could be possible for you to obtain representation with no up front charge to yourself – see the Representation page to find out if you could qualfiy. If you want to discuss ex gratia payments or other aspects of compromise agreements, dont hesitate to call us on 0800 533 5134, fill out the message box to the right hand side, or email info@compromiseagree.com.
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