Ex Gratia Payments [Employee Guide]

Ex gratia payments and settlement agreements

If you’re considering signing a settlement agreement or have recently been told your role is at risk of redundancy, you may have heard the term “ex gratia payment” mentioned.

To keep things clear during an already stressful time, we’ve put together this comprehensive guide to help you understand:

• What ex gratia payments are
• How ex gratia payments work in redundancy and settlement agreements
• What tax implications they might have
• And more.

What is an ex gratia payment?

An ex gratia payment is a sum of money your employer chooses to pay you as a gesture of goodwill. It is not a legal entitlement. Instead, it’s often offered to help reach an amicable conclusion to your employment, particularly when parting ways under a settlement agreement or redundancy.

In Latin, “ex gratia” means “out of grace”, and that’s precisely how this payment is treated. It’s discretionary, voluntary, and typically offered to encourage a smooth exit without dispute.

When are ex gratia payments used?

Ex gratia payments are most commonly associated with:

• Termination of employment by mutual agreement
• Redundancy situations
• Settlement agreements to prevent claims from going to tribunal.

What is a settlement agreement?

A settlement agreement is a legally binding contract that confirms the terms of an employee’s exit from a company. It usually includes details about your final payments, the agreed leaving date, any confidentiality obligations or restrictive covenants, and whether you’ll receive a reference.

By signing a settlement agreement, you’re agreeing not to bring specific legal claims against your employer in future – often in exchange for a financial package. So, this legal document offers both parties clarity and closure.

Importantly, for a settlement agreement to be valid, you must receive independent legal advice, something we provide quickly and at no cost to you.

Are ex gratia payments included in settlement agreements?

When you sign a settlement agreement, you agree not to pursue any future legal claims, such as unfair dismissal or discrimination against your employer. In return, your employer may include an ex gratia sum as part of the overall exit package.

Unlike redundancy pay, this portion of the payment is discretionary and not based on a contractual entitlement. It’s commonly used to reflect the employer’s goodwill and, in some cases, to acknowledge years of service, smooth over difficult circumstances, or simply offer a clean break.

Will you get an ex gratia payment if you are being made redundant?

It depends. It is not uncommon to receive an ex gratia payment on redundancy, especially if your employer wants to avoid any future disputes. So, alongside your statutory or contractual redundancy pay, you may be offered an additional sum as an ex gratia payment.

If you’re being made redundant, make sure you understand:

• What your statutory redundancy package will be
• What you’re contractually entitled to
• What is being offered as an extra (ex gratia)
• What is taxable, and what is tax-free?

How much is an ex gratia payment?

There are no fixed rules about the size of an ex gratia payment. It depends on a range of factors, including:

• Your length of service
• The circumstances of your exit
• Whether your employer wants to avoid the risk of legal claims
• Whether you’re being asked to sign a settlement agreement.

We can help you assess whether the amount offered in any settlement agreement feels fair and proportionate.

What is a fair ex gratia payout?

Any ex-gratia compensation offered is at the employer’s discretion. Senior employees and those with strong potential claims often walk away with higher payments, while employers usually offer those in junior roles, or those leaving under less contentious circumstances, smaller sums or nothing at all.

Can you negotiate an ex gratia payment?

In many cases, yes. While ex gratia payments are discretionary, they are often negotiable, particularly as part of a settlement agreement. If you believe the sum offered is too low, you may be able to ask for more – ideally in a calm, constructive way.

We can advise you on whether negotiation is worthwhile. It’s worth noting that employers may not always increase their offer, but a respectful negotiation can sometimes lead to a better outcome.

How to convince your employer to provide an ex gratia payment

While ex gratia payments are not guaranteed, there are several ways to encourage your employer to offer one as part of a settlement agreement – or to raise the offer already on the table:

1. Raise potential legal claims

If there’s a chance you could bring an employment claim, your employer may prefer to avoid the time, cost and risk of tribunal proceedings. Highlighting these risks (or having your solicitor do so) can give you a strong foundation for an ex gratia offer.

2. Point to restrictive covenants

If your contract includes clauses restricting your future employment, such as non-compete, non-solicitation, or confidentiality obligations, you may argue that these limitations affect your ability to move on quickly. An ex gratia payment can be used to reflect this loss of freedom and opportunity.

3. Offer to leave quickly

If your employer is keen to resolve matters swiftly or avoid a drawn-out process, offering to leave quickly can be a strong negotiating tool. By showing you’re willing to exit without delay, you may increase the likelihood of securing a suitable ex gratia payment. Employers often appreciate a clean break to avoid internal speculation or preserve team morale.

4. Refer to company policies and precedents

If other employees in similar situations have received ex gratia payments, it may be reasonable to expect consistent treatment. If you’re aware of a precedent, referencing it can strengthen your case.

5. Highlight your length of service and seniority

Long serving or senior employees often have more complex exits. A generous ex gratia payment can reflect years of contribution, loyalty, or the sensitivity of a senior departure. Employers may also wish to preserve relationships and protect their brand.

Do you pay tax on an ex gratia payment?

The tax treatment of ex gratia payments can be complex, but in general:

• The first £30,000 of an ex gratia payment is usually be paid tax-free
• Anything over £30,000 is typically subject to Income Tax
• National Insurance contributions are generally not due on ex gratia payments.

The £30,000 tax-free limit applies to the total of all qualifying payments, not to each one individually.

So, if you receive both:

• Statutory redundancy pay (which is always tax-free), and;
• An ex gratia payment

…these will be added together and counted toward the same £30,000 tax-free threshold.

Also, when looking at a financial settlement package, it’s important to distinguish between what is genuinely ex gratia and what might be payment in lieu of notice (PILON) or other contractual sums, which are taxable. We’ll help you understand the breakdown of your payment to ensure everything is handled correctly.

You can find out more about the tax implications of settlement agreement in our handy guide.

GTE Jargon Buster
Payment in lieu of notice (PILON) means you receive a payment equivalent to your notice period without having to work it.

What are the other payments that fall under a settlement agreement?

If your employer has asked you to sign a settlement agreement, the financial compensation offered will likely be a key priority.

A reasonable settlement agreement typically includes the following:

• Statutory redundancy pay (if applicable): If your settlement agreement is part of a redundancy process, you should receive at least the statutory redundancy payment. Statutory redundancy pay is always tax-free.
• Contractual redundancy pay: Some employers offer enhanced redundancy pay above the statutory minimum. This may qualify for the £30,000 tax-free exemption, provided it is paid solely as compensation for your job ending and is not treated as normal earnings. Any amount over £30,000 will be subject to Income Tax.
• An ex-gratia payment: This compensation payment is offered to you as a goodwill gesture, usually tax-free, up to £30,000.
• Bonus and commission payments: If your employment contract entitles you to upcoming bonuses or commission payments, these should be included in your settlement agreement. These as taxable.
• Pension contributions: If your employer usually contribucontributes to your pensiontes to your pension, you can negotiate continued contributions as part of the settlement package.
• Holiday pay: A reasonable settlement agreement should include payment for any accrued but untaken holiday days, calculated based on your contractual allowance.
• PILON: Your PILON amount should reflect your basic salary for the notice period and may include benefits like car allowance or private healthcare, depending on your contract.

Your solicitor will assess whether the financial compensation aligns with what is reasonable and negotiate if necessary to secure a fair offer.

When will you receive your ex gratia payment?

The timing of your ex gratia payment will usually be set out in your settlement agreement. In most cases, employers aim to pay within 7 to 28 days of the contract being signed or from your official termination date, depending on how the deal is structured.

Your payment must be explicit in the settlement agreement. If not, this can and should be clarified during the negotiation process.

FAQs about ex gratia payments

It’s natural to have questions about what you might receive, what you’re entitled to, and how ex gratia payments fit into the picture. Below, we’ve answered the most common queries employees ask about these discretionary payments to help you feel informed and confident as you navigate this stage.

Contact GTE Settlement Agreement Solicitors today

If you’ve received an offer, we can advise and help you sign off on the same day – giving you the clarity and closure you need to move forward confidently. Through our nationwide service, we support employees across the country including London, Birmingham, Manchester, and the Home Counties.

At GTE Settlement Agreement Solicitors, we offer our clients:

• Same-day settlement agreement advice and sign-off
• A calm, reassuring and straightforward process
• No cost to you (your employer covers our legal fees)
• Reassurance that your agreement is fair and legally sound

Call today for your free consultation on 020 7247 7190 or complete the simply enquiry form on this page.