Ex-gratia payments and the £30,000 rule
The exemption everyone knows, and the three details that catch employers out: aggregation, Class 1A at 15%, and PENP coming off the top first.
The first £30,000 of a qualifying termination payment is tax-free, and the balance above it carries income tax plus employer Class 1A National Insurance at 15%. The employee pays no NI on it. Two things catch employers out: the £30,000 applies to the total of all termination payments, not each one separately, and post-employment notice pay is stripped out and taxed in full before the exemption is applied at all.
What is an ex-gratia payment?
A payment made on termination that the employer was under no contractual obligation to make - compensation for loss of employment rather than money earned. That distinction is what lets it fall within the £30,000 exemption. Anything the contract entitled the person to, such as notice pay, a contractual bonus or accrued holiday, is earnings and is taxed as earnings, whatever it is labelled in the settlement.
Calling something ex-gratia does not make it so. HMRC looks at what the payment is actually for.
How is the tax worked out?
| Element | Amount | Treatment |
|---|---|---|
| Post-employment notice pay | £5,000 | earnings - income tax and full NI, employer and employee |
| Balance of the package | £40,000 | termination award |
| - first £30,000 | £30,000 | tax-free, no NI |
| - excess | £10,000 | income tax + employer Class 1A at 15%; no employee NI |
The employer's Class 1A on that £10,000 excess is £1,500 - a cost that belongs in the settlement budget, and one people routinely forget when agreeing a headline figure.
Is the Class 1A rate still 13.8%?
No, and this is worth checking against anything you read elsewhere. Class 1A on expenses, benefits and termination awards above £30,000 is 15% for 2026/27 (gov.uk rates and thresholds). A great deal of published guidance still quotes 13.8%, which understates the employer cost of every settlement above the exemption by more than a tenth.
Does the £30,000 apply to each payment?
No - it applies once, to the aggregate of all qualifying termination payments from that employment. Splitting a settlement into three payments does not produce three exemptions, and payments from associated employers are aggregated too.
- Statutory redundancy pay - tax-free itself, but it uses up part of the allowance.
- Enhanced or contractual redundancy pay above the statutory amount.
- Ex-gratia compensation for loss of employment.
- Not PENP, worked notice, holiday pay or a contractual bonus - those are earnings and sit outside the exemption entirely.
How is an ex-gratia payment reported to HMRC?
Even the tax-free part goes through payroll - "tax-free" never means "invisible to HMRC". The whole termination payment is reported on the Full Payment Submission when it's paid, and the Class 1A on the excess over £30,000 is paid through payroll in real time alongside it (gov.uk). That is a different route from the Class 1A on benefits in kind, which waits for the P11D(b) after year end - a distinction that catches out payroll teams who only meet Class 1A once a year. Get the payment into the pay run in which it's made, not parked for a year-end adjustment.
What about a payment for injury to feelings?
Compensation genuinely for discrimination that occurred independently of the termination is treated differently from money paid because the employment ended. The distinction is fact-sensitive and gets litigated, so take advice rather than assuming - describing a payment one way in a settlement agreement does not settle its tax treatment.
If the exit is a redundancy, the payment sits on top of a process that has to stand up on its own: see the redundancy process guide for the pool, the selection criteria and the consultation thresholds.
Are ex-gratia payments taxable?
The first £30,000 is not, provided the payment genuinely compensates for the loss of employment rather than paying for something the contract already owed. Above £30,000 the excess is taxed as income and carries employer Class 1A National Insurance at 15 per cent - and remember the exemption applies to the aggregate of all termination payments, not to each one. If someone tells you "ex-gratia means tax-free", they have the first half of the rule and not the second.
Ex-gratia payments in redundancy
Statutory redundancy pay, any enhanced redundancy terms, and an ex-gratia top-up all share the same single £30,000 allowance - the statutory element is tax-free in its own right but still consumes headroom. The redundancy itself must stand up independently: pool, selection, consultation. An ex-gratia payment sweetens a fair process; it does not repair an unfair one. See the redundancy process guide for that side.
Ex-gratia offers and settlement agreements
Most ex-gratia payments of any size arrive wrapped in a settlement agreement: the employer pays, the employee gives up specified claims, and the agreement is only binding on statutory claims if the employee had independent legal advice (which the employer conventionally contributes towards). Two practical notes: label each element of the package separately, because a tribunal or HMRC will look at what a payment actually was, not what it was called; and the tax indemnity clause most agreements carry moves risk around - it does not change what is owed. For the employee side of negotiating, this page deliberately stops here: we write for employers, and advice on negotiating against them belongs elsewhere.
Practical points for the settlement
- Budget the employer NI. A £45,000 package is not a £45,000 cost once Class 1A on the excess is added.
- Do the PENP calculation first, because it determines how much is even eligible for the exemption - the PENP calculator does it.
- Itemise the settlement. Set out notice, holiday, statutory redundancy and compensation separately, so the tax treatment of each is on the face of the document.
- Include a tax indemnity, as most settlement agreements do - but note it does not change what is actually owed.
- Settlement agreements need independent legal advice for the employee to be binding on statutory claims, and the employer usually contributes to that cost.
Costing a full exit? The redundancy cost calculator covers statutory pay, notice and holiday; garden leave versus PILON covers how the notice itself is handled.
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Exit figures from real records
CoDash keeps service dates, salaries, notice periods and leave balances current - so a settlement is costed from data rather than reconstructed under time pressure.