Is an ex gratia payment taxable in the UK?

Full answer

An ex gratia payment is a sum an employer pays voluntarily, with no contractual obligation, typically on termination of employment as compensation for loss of office. Whether it is taxable depends entirely on what it really is, not on the label used. The key relief is the GBP 30,000 exemption for genuine termination payments: the first GBP 30,000 of a qualifying compensation payment is free of both Income Tax and National Insurance. Any excess above GBP 30,000 is taxed as employment income through PAYE and, since the 2018 changes, also attracts employer (Class 1A-style) National Insurance at 15% for 2026/27. The employee pays no NI on the excess, only Income Tax. Crucially, sums that are actually earnings do not benefit from the GBP 30,000 exemption. This includes contractual notice pay, holiday pay, bonuses and 'post-employment notice pay' (PENP) - a statutory calculation that treats the value of unworked notice as fully taxable earnings even if dressed up as compensation. Only the genuine compensation element above PENP can use the GBP 30,000 band. Worked example: an employee receives a GBP 45,000 ex gratia payment with no notice element. The first GBP 30,000 is tax-free; the remaining GBP 15,000 is taxed at the employee's marginal rate - GBP 6,000 at 40% for a higher-rate taxpayer - with employer NI of 15% on that GBP 15,000 payable by the employer. Who it affects: anyone made redundant or leaving under a settlement agreement. Statutory redundancy pay also counts towards the GBP 30,000 limit. 2026/27 detail: the GBP 30,000 threshold has been unchanged for many years and is not inflation-linked, so larger settlements increasingly fall into tax. Use a take-home pay or income tax calculator to model the taxable portion.

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