An ex gratia redundancy payment is money your employer offers on top of anything the law or your contract requires you to receive when your job ends. The first £30,000 of a genuine redundancy payment is free from income tax, and you pay no employee National Insurance on any part that falls under the termination payment rules. Anything above £30,000 is taxed as income, and your employer owes Class 1A National Insurance on the excess. Because these payments are discretionary, they almost always arrive inside a settlement agreement that spells out what you get and what claims you give up in exchange.
How It Differs From Statutory Redundancy Pay
Statutory redundancy pay is a legal right. If you have at least two years of continuous service and your employer makes you redundant, the Employment Rights Act 1996 requires them to pay a set amount based on your age, weekly pay, and length of service.1Legislation.gov.uk. Employment Rights Act 1996 – Part XI The weekly pay used in that calculation is capped at £751 for redundancies from 6 April 2026, with a maximum of 20 years of service counting toward the formula.
An ex gratia payment sits on top of that statutory minimum. Your employer has no obligation to offer it, can set the amount at whatever figure they choose, and can withdraw the offer any time before you both sign a binding agreement. The term literally means “as a favour,” and that voluntary character is what separates it from statutory pay, contractual bonuses, or notice pay. Employers typically offer these sums when they want a clean break with no tribunal claims hanging over the business.
The £30,000 Tax-Free Threshold
Section 403 of the Income Tax (Earnings and Pensions) Act 2003 creates a £30,000 exemption for payments made in connection with the termination of employment.2Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 403 Your statutory redundancy pay and your ex gratia payment both count toward this threshold, and they are added together, not treated separately. If your statutory redundancy comes to £8,000 and your ex gratia payment is £25,000, the combined £33,000 means the first £30,000 is tax-free and the remaining £3,000 is taxed as earnings.
The limit applies per termination, not per tax year. If payments cross two tax years from the same redundancy, HMRC uses up the £30,000 against earlier payments first.2Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 403 Payments from associated employers also get aggregated, so splitting payments across group companies to stay under the threshold doesn’t work.
What Still Gets Taxed in Full
Several parts of your final pay packet do not qualify for the £30,000 exemption and are taxed as normal earnings, whether or not they push you over the threshold:3GOV.UK. Tax on Termination Payments
- Outstanding wages and accrued holiday pay, taxed and subject to National Insurance as if they were a normal payslip.
- Any payment in lieu of notice, whether or not your contract includes a PILON clause.
- Bonuses triggered by termination, which are treated as earnings rather than as a termination payment.
The PILON point trips people up more than anything else. Since April 2018, the post-employment notice pay rules under Section 402D of the same Act automatically carve out a portion of your termination payment as taxable earnings, calculated by reference to your basic pay and unworked notice period.4Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 402D Even if your contract says nothing about PILON and your employer simply hands you a lump sum, HMRC will calculate what you would have earned during your notice period and tax that slice at your normal rate. Only what’s left after that calculation feeds into the £30,000 exemption.
National Insurance on the Payment
The National Insurance position works in your favour. As an employee, you pay no Class 1 National Insurance on any part of a genuine termination payment, whether it sits below or above £30,000. Your employer, however, owes Class 1A National Insurance on the amount above £30,000, a rule in force since 6 April 2020.5GOV.UK. Income Tax and National Insurance Contributions – Treatment of Termination Payments
This asymmetry matters if you are negotiating. Every pound above £30,000 costs your employer the payment itself plus employer NICs on top, which is often why employers push back on large excess figures. From your side, the same pound costs income tax but no employee NI, so it lands more efficiently than an equivalent slice of salary would.
Why It Comes With a Settlement Agreement
A settlement agreement, previously called a compromise agreement, is the legal document that makes the arrangement enforceable. It sets out what the employer pays and which legal claims you waive in return.6Acas. Using Settlement Agreements By signing, you give up the right to bring claims such as unfair dismissal or discrimination to an employment tribunal. The employer gets finality; you get a payment that, without the agreement, they would have no reason to make.
A well-drafted agreement breaks the total down into its component parts: statutory redundancy pay, ex gratia payment, payment in lieu of notice, accrued holiday, and any contribution toward your legal fees. Getting the split right on paper matters because HMRC guidance makes clear that when a single lump sum is paid “in settlement of all claims” without attribution, the facts will be examined and a reasonable apportionment agreed.7HM Revenue & Customs. EIM12965 – Termination Payments and Benefits
What Makes the Agreement Binding
A settlement agreement is only binding if it meets the conditions in Section 203 of the Employment Rights Act 1996.8Legislation.gov.uk. Employment Rights Act 1996 – Section 203 It must be in writing, must identify the specific claims it covers, and must state that these statutory conditions are satisfied. Most importantly for you, it must confirm that you have received advice from a named independent adviser about the terms and their effect on your right to bring tribunal claims. That adviser can be a qualified solicitor, a certified trade union official, or a certified adviser at an advice centre, and they must carry current insurance covering the advice.
If any of these requirements is missing, the agreement is not valid and you could still bring tribunal claims despite having signed. Employers typically contribute toward the cost of your advice, with contributions commonly falling in the range of £250 to £750 plus VAT. That fee covers a solicitor reviewing the agreement and telling you whether the terms are reasonable, not representing you in extended negotiations, so keep expectations realistic about what the employer’s contribution buys.
Confidentiality and What You Can Still Say
Most settlement agreements include a confidentiality clause preventing you from discussing the terms or even the existence of the agreement. These clauses are voluntary, meaning neither side has to agree to them, but in practice employers treat them as standard.9Acas. Confidentiality – Settlement Agreements
They also have hard limits. A confidentiality clause cannot stop you from whistleblowing, reporting a crime to the police, or sharing information about a crime if you are a victim seeking advice or support. From 6 April 2026, sexual harassment is explicitly a qualifying disclosure under whistleblowing law, so anyone who blows the whistle on sexual harassment is protected from dismissal and detriment regardless of what a settlement agreement says.9Acas. Confidentiality – Settlement Agreements Any clause in your agreement that purports to restrict these rights is unenforceable.
How Much to Expect and Room to Negotiate
No legal formula dictates what an ex gratia payment should be, and amounts vary widely. The most common variables are:
- Length of service. Longer tenure almost always produces a higher payment, and many employers start from a multiplier of the statutory formula, such as two or three times the statutory figure.
- Salary. Higher earners tend to receive larger ex gratia sums, partly because the statutory cap on weekly pay makes the minimum feel disproportionately small at senior levels.
- Strength of potential claims. If you have a plausible unfair dismissal or discrimination claim, your employer has a financial incentive to offer more in exchange for you giving it up.
- Company circumstances. A profitable business restructuring voluntarily may offer more generous terms than one in financial difficulty making compulsory cuts.
Negotiation is normal and expected. The first offer is rarely the final one, and getting independent legal advice before responding is not just a statutory requirement for the agreement to bind you, it also gives you a realistic read on whether the figure reflects the strength of your position.