Glossary · UK
What is Ex Gratia Payment?
A voluntary payment made without any legal obligation, often by an employer on termination, recognising a moral rather than contractual duty.
Full Definition
An ex gratia payment is money paid voluntarily, where the payer accepts no legal liability to make it. The Latin phrase means 'as a favour'. In a UK employment context it usually arises on termination of employment - for example a goodwill or compensation element in a settlement agreement that is not pay the worker was contractually entitled to. The tax treatment depends on what the payment really is, not just its label. Genuine compensation for loss of office can fall within the GBP 30,000 tax-free exemption for termination payments, with any excess taxed as income and subject to employer National Insurance. By contrast, payments that are actually for work done, notice, bonuses or accrued holiday are fully taxable and liable to employee National Insurance. Calling something ex gratia does not by itself make it tax-free, so the underlying nature must be examined. Pensions and some compensation are treated differently again. Take advice before signing a settlement to confirm the correct treatment.