Are there any scenarios where termination pay can be all ex-gratia?

[iloveholidays]

Im in settlement discussions at the moment and felt like what was offered was all ex-gratia, however the other side are now saying part is payment in lieu and therefore taxable.

Are there any scenarios where the entire payment can be all ex-gratia?

Thanks in advance!

Pay in lieu of notice will always be subject to tax as it is salary.

Then the ex-gratia/ settlement would be tax free up to £30k.

Many thanks for your reply.

I’ve understood it will be taxable, however we’d agreed an amount and I understood it to all be ex-gratia/injury to feelings and therefore didn’t include payment in lieu. I just can’t confirm online if all settlement amounts have to include payment in lieu if notice pay wasn’t paid or if they can all be treated as ex-gratia.

I appreciate your comments - thank you

Your notice period is contractual so you either need to work it or your employer needs to pay you in lieu of it. Failure to do so would be a breach of contract.

If you don't work your notice period, HMRC will almost certainly regard some of the payment as in lieu of notice and hence taxable regardless of anything you agree with your employer.

Have you had legal advice on the settlement?

The definition of an ex-gratia payment (which HMRC would treat as not being taxable) is any payment not deemed to be contractual. Your employer doesn't get to choose.

So you would need to ensure it is ring-fenced by, for example, having it specified in the settlement agreement document you and your employer sign, that £xxx payment is ex-gratia. Notice period would not fall within that amount, so if your employer is proposing to include it as part of your settlement amount then your solicitor may decide that's not acceptable if it reduces the total of the settlement, and push back on your behalf.

Normally, your employer would agree to paying the solicitor's fee associated with them reviewing the document to ensure it is fair and reasonable. Cost is approx £250-£300.