exitagreementEx gratia payments
An ex gratia payment is money paid without a legal obligation to pay it. In a UK settlement agreement it is the compensation half — the part that can use the £30,000 tax threshold. But “ex gratia” is a label, and the tax follows what the payment actually is, not what it is called.
Ex gratia and the payments it gets confused with
Nine labels for money on leaving a job, and only some of them can use the threshold. The third column is what decides your tax bill.
| Label | What it is | Tax consequence |
|---|---|---|
| Ex gratia payment | Money paid without a legal obligation to pay it | A termination payment — can use the £30,000 threshold |
| Compensation for loss of employment | The usual description of the ex gratia element in a settlement | Same as above |
| Termination payment | Any payment in connection with ending the employment, ITEPA 2003 s.401 | Chapter 3 applies unless it is already earnings |
| Statutory redundancy pay | Owed by statute if you qualify — not ex gratia at all | Also counts towards the threshold, and uses it up |
| Enhanced redundancy pay | Above-statutory redundancy pay under a scheme | Depends whether the scheme is contractual or discretionary |
| Payment in lieu of notice | Notice pay instead of working the notice | Earnings — taxed in full, never reaches the threshold |
| Post-employment notice pay | The notice element the statute calculates for you, ITEPA 2003 s.402D | Earnings, even if the agreement calls it ex gratia |
| Injury to feelings | Compensation in a discrimination claim | Part of the settlement’s compensation half |
| Holiday pay, unpaid wages, bonus | Money you had already earned | Earnings — taxed in full |
Provisions linked to legislation.gov.uk. Checked 22 September 2026.
Key points
- “Ex gratia” means paid without obligation. In a settlement it is the compensation for losing the job.
- A genuine termination payment is taxed only on the amount above £30,000.
- The threshold is shared — with statutory redundancy pay, and across the same and associated employers.
- The label does not decide the tax. Earnings are taxed in full whatever the agreement calls them.
- If an “ex gratia” enhancement is contractual, it was never a favour — it was your entitlement.
What ex gratia means
It is Latin, and in English legal usage it describes a payment made as a matter of favour rather than of obligation. Nobody could have sued for it. That is the whole idea.
In an employment settlement
It is the usual label for the money that is not notice, holiday or wages. Those are things you were owed anyway. The ex gratia element is what the employer pays on top to buy your waiver of the claims you could bring — which is why it is the only part of a settlement that is genuinely negotiated.
Outside employment
The phrase is used more widely — for goodwill payments made without an admission of liability, for example. This page is about the employment meaning, because that is where the tax rules below apply.
Is an ex gratia payment taxable?
A genuine one is taxed only above the threshold. The mechanism takes two sections.
Which payments the termination rules cover
This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with— (a) the termination of a person’s employment … This Chapter does not apply to any payment or other benefit chargeable to income tax apart from this Chapter.Read the section on legislation.gov.uk
So the chapter covers payments made in connection with the termination of employment — with one decisive exception in the last sentence. Anything already chargeable to income tax elsewhere, which means anything that is earnings, is not a Chapter 3 payment at all.
How much of it is taxed
The amount of a payment or benefit to which this section applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the £30,000 threshold.Read the section on legislation.gov.uk
Only the excess over £30,000. A qualifying ex gratia payment of less than that, with nothing else using the threshold, is not charged to income tax.
The same diagram as a table
| Part | What it covers | Amount | Tax treatment |
|---|---|---|---|
| Part 1 — contractual | Notice pay, holiday pay, unpaid wages, bonus or commission | £8,200 | Income tax and National Insurance in full |
| Part 2 — ex gratia | Statutory redundancy pay, compensation for loss of employment, injury to feelings | £26,000 | First £30,000 free of tax and National Insurance |
| Total | — | £34,200 | — |
Threshold figure: Income Tax (Earnings and Pensions) Act 2003, s.403(1). Illustrative amounts.
Why the first £30,000 is not always free
The threshold is the most repeated number in this subject and the most frequently misunderstood. Three things reduce it in practice.
It is shared, not per payment
For the purpose of the £30,000 threshold in section 403(4) and (5), the payments and other benefits provided in respect of an employee or former employee which are to be aggregated are those provided— (a) in respect of the same employment, (b) in respect of different employments with the same employer, and (c) in respect of employments with employers who are associated … If payments and other benefits are received in different tax years, the £30,000 is set against the amount of payments and other benefits received in earlier years before those received in later years.Read the section on legislation.gov.uk
One threshold across the same employment, other employments with the same employer, and employments with associated employers. A group of companies does not give you a fresh one per company.
Statutory redundancy pay uses it up
Statutory redundancy pay also counts towards the threshold. Someone with a large statutory payment has less of the £30,000 left for the ex gratia element than someone who is not being made redundant. How the statutory figure is worked out.
The notice element is carved out
Post-employment notice pay is calculated from your basic pay and your dates and treated as earnings whatever the agreement calls it.
The amount of a termination award to which this section applies is treated as an amount of earnings of the employee, or former employee, from the employment.Read the section on legislation.gov.uk
So an agreement that puts almost everything into an ex gratia payment, for someone leaving immediately with a long notice period, will still have the notice element taxed in full. How payment in lieu of notice is taxed.
Not sure how your payment has been split?
The split between the two halves decides the tax. Send your postcode and the deadline you have been given.
When a payment called ex gratia is not ex gratia
The word describes a payment made without obligation. If there was an obligation, the word is wrong, whatever the document says.
Contractual entitlements
In those Parts “earnings”, in relation to an employment, means— (a) any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or (c) anything else that constitutes an emolument of the employment.Read the section on legislation.gov.uk
A bonus you had earned, commission due, or a payment your contract promised on termination is an emolument of the employment. It is earnings, and s.401(3) keeps it out of the threshold chapter entirely.
Enhanced redundancy schemes
If your employer operates an enhanced redundancy scheme that forms part of your contract, the enhancement is your entitlement. Calling it ex gratia in a settlement letter does not change what it is — and presenting it as a concession is presenting your own money as a favour. How to tell a contractual scheme from a discretionary one.
Who carries the risk if the label is wrong
Usually you. Most settlement agreements contain a tax indemnity under which, if HMRC later decides more tax was due, you reimburse the employer. A generous ex gratia label on something that is really earnings is not generosity if the bill comes back to you. The indemnity clause and what to ask about it.
How much should the ex gratia payment be?
There is no statutory formula for it, which is the honest answer and the useful one.
It is priced against the claim
An employer is buying certainty. The ex gratia payment is worth roughly what refusing it would cost them: legal fees to defend a claim, management time, and the risk of an adverse finding. That is why a discrimination element, a live grievance or a process that looks decided in advance all move it, and length of service moves it less than people expect. What actually moves the figure.
A range, not a number
Our calculator estimates this element as a range from a published scoring rule, and says so. Run your own figures · the rule, in full.
Common questions
What does ex gratia mean?
It is Latin, and in English legal usage it describes a payment made as a matter of favour rather than because the payer was legally obliged to make it. In an employment context it is the usual label for the compensation element of a settlement — the money that is not notice, holiday or wages you were owed anyway.
Is an ex gratia payment taxable?
Up to a point. A genuine ex gratia payment made in connection with the termination of employment falls under Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act 2003, and under section 403 it counts as employment income only to the extent that it exceeds the £30,000 threshold. So the first £30,000 is not taxed and anything above it is.
Is the first £30,000 always tax free?
No, for two reasons. The threshold is shared: section 404 aggregates payments from the same employment, other employments with the same employer and associated employers, and statutory redundancy pay counts towards it too. And it only applies to payments that are genuinely termination payments — anything that is really earnings, including the notice element calculated under the post-employment notice pay rules, is taxed in full regardless of the label.
What is an ex gratia redundancy payment?
Usually the amount paid on top of statutory redundancy pay. Whether it is truly ex gratia depends on whether you were entitled to it: if your employer has a contractual enhanced redundancy scheme, the enhancement is your entitlement, not a favour, even if the letter calls it ex gratia.
Can an employer call any payment ex gratia to save tax?
No. The label does not decide the tax treatment. Section 401(3) says the termination-payment chapter does not apply to anything already chargeable as earnings, and section 402B treats the post-employment notice pay element as earnings whatever it is called. A mislabelled payment is also usually your problem rather than the employer's, because of the tax indemnity in most settlement agreements.
Are there rules about ex gratia payments to employees?
The tax rules are the ones on this page. Beyond that, an ex gratia payment in a settlement is whatever the agreement says it is: there is no statutory minimum and no statutory formula for it. It is priced against what the claim you are giving up would cost the employer to defend.
Is ex gratia the same as compensation?
In a settlement agreement the two words are generally used for the same thing: money for losing the job that you were not otherwise owed. The distinction that matters is not ex gratia versus compensation, it is termination payment versus earnings.
Sources cited on this page
- Income Tax (Earnings and Pensions) Act 2003, s.401 — application of Chapter 3
- Income Tax (Earnings and Pensions) Act 2003, s.62 — earnings
- Income Tax (Earnings and Pensions) Act 2003, s.403 — the £30,000 threshold
- Income Tax (Earnings and Pensions) Act 2003, s.404 — how the threshold applies
- Income Tax (Earnings and Pensions) Act 2003, s.402B — awards treated as earnings
- Acas — Discussing and negotiating an offer
- GOV.UK — Redundancy pay
Every figure above was read from the source it is attributed to on 19 September 2026. How we check this.
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