Ex-gratia Payments in Settlement Agreements
What is an “ex-gratia payment”?
An ex-gratia payment is a sum paid by an employer to an employee where there is no contractual obligation (no requirement) to do so. Ex gratia payments are, therefore known as ‘gestures of goodwill’ or a ‘golden handshake’.
In Settlement Agreements this is a payment indicating that the employer is paying this ‘without admission of liability’ and the use of the term ‘ex-gratia’ simply states that the employer is not bound or under any duty to pay this.
These payments are commonly made in situations where an employer wants to avoid spending time carrying out formal procedures, holding disciplinary meetings, looking into issues, or carrying out lengthy redundancy procedures.
Settlement Agreements are often used to save time and resources if they are agreed by mutual consent and unlike with statutory redundancy pay, an ex gratia payment can be anything, there is no limit to the amount.
Do I pay tax on an “ex-gratia payment”?
Payments made between an employer and employee are subject to tax as they will be described as ‘arising out of the contract of employment’ by HMRC.
Ex-gratia payments are an exception and can fall under a tax exemption in s.403 Income Tax (Earnings and Pensions) Act 2003 for any amounts under £30,000.00. This is because the payments is not made for an employee’s work but it is a voluntary payment.
Ex-gratia payments and statutory redundancy payments under £30,000.00 will be paid free of tax. Payment in lieu of notice, holiday pay and normal contractual pay will be subject to the normal tax and national insurance deductions, even in a Settlement Agreement. You will need to discuss your specific circumstances with expert settlement agreement solicitors for specific advice.
Employers will also require a tax “indemnity” clause as part of the settlement agreement. This means if HMRC decided there was any tax payable on the amounts you have received, you will be liable for the tax to be paid. These indemnity clauses often state that if HMRC claimed the tax from your employer, you would have to reimburse your employer.
How we can help?
All settlement agreements include common terms which protect an employer’s interest however our expert settlement agreement solicitors at Lawson West can help you better understand the complexities and practical implications of the terms on offer.
We can advise you on any potential risks and pitfalls as well as helping to reach your objectives and protect your position for the future.
Our specialist settlement agreement solicitors are available to provide the appropriate advice and guidance in relation to any aspect of settlement agreements or employment law.
Please contact us on Tel: 0116 212 1000 or 01858 445 480, alternatively complete the free Contact Us form here and we will get in touch as soon as possible.