Home Legal Services Employment Settlement Agreements for Employees
Written by:Â Owen John, Employment Law Partner, Darwin Gray | Last updated: 24/10/2026 | Reviewed by: Owen John
An ex gratia payment is money your employer pays you that they weren’t legally required to pay. The Latin phrase means “out of grace” or “as a favour”. In an employment exit, it’s usually the compensation element of a settlement, the sum you receive for losing your job and for giving up your right to bring claims, over and above what you were strictly owed.
That’s the important distinction. Your contractual entitlements, salary up to your leaving date, notice pay, accrued holiday, a bonus you’d earned, aren’t ex gratia, because your employer owes them to you anyway. The ex gratia payment is the extra bit on top, the compensation for the exit itself.
It’s one of the most important figures in any settlement agreement, because it’s usually the part with the most favourable tax treatment, and the part there’s most room to negotiate.
Because they want a clean break. When an employer offers a settlement agreement, they’re asking you to give up your right to bring claims against them, unfair dismissal, discrimination, breach of contract, and so on. The ex gratia payment is, in effect, what they’re paying for that certainty.
So it’s not really a “favour”, despite the name. It’s compensation, and the amount reflects things like your length of service, how strong any potential claims are, how keen the employer is to resolve things quickly, and how well the negotiation is handled. That last point matters more than people expect, which is why advice pays for itself here.
This is the question everyone asks. A genuine ex gratia payment made because your employment is ending can often benefit from a tax exemption on the first £30,000. Anything above £30,000 is taxable in the normal way.
But, and this is the part that trips people up, several conditions and traps apply:
Because the line between taxable and tax-free can be fine, how your settlement agreement is worded really matters. We check that each payment is correctly categorised, so you don’t overpay tax, or get caught out by an HMRC challenge later. For the detail, see our guide to settlement agreement tax. For specialist tax advice, you should consult a tax expert or accountant.
These three get muddled constantly, so here’s the quick version:
In a redundancy situation, you might see all three in the same settlement. Making sure they’re labelled and taxed correctly is one of the first things we check. Our redundancy and settlement agreements guide goes into how these fit together.
An ex gratia offer is a starting point, not a fixed price. Whether it’s fair depends on your circumstances, your service, your salary, and crucially the strength of any claims you’d be giving up. People are often offered less than they could reasonably negotiate, simply because they don’t realise they have leverage. Before you accept a figure, it’s worth finding out what it should be. Our guide on how much you should get covers this, and we’re always happy to give you a straight view.
Ex gratia is Latin for “as a favour” or “out of grace”. In employment, an ex gratia payment is money your employer pays you that they weren’t contractually obliged to pay, usually compensation for losing your job as part of a settlement agreement. It’s separate from things you’re owed anyway, like salary, notice pay, or accrued holiday. Despite the “favour” wording, it’s really compensation, and the amount is often negotiable.
The first £30,000 of a genuine ex gratia termination payment can often be paid free of tax and National Insurance. Anything above £30,000 is taxable. But the payment has to be a true termination payment, money you weren’t already owed. Notice pay (PILON) doesn’t qualify and is taxed in full, and the £30,000 is a combined cap across your ex gratia sum and statutory redundancy pay. Getting the categorisation right in the agreement is important.
No. Statutory redundancy pay is a legal entitlement if you’re genuinely made redundant with two or more years’ service. An ex gratia payment is extra compensation your employer chooses to pay on top, which they’re not obliged to give. In a redundancy exit you might receive both, plus notice pay. They’re taxed and treated differently, so it matters that your settlement agreement separates them out correctly.
Yes, by definition, an ex gratia payment is one your employer isn’t obliged to make. But in practice, if they want you to sign a settlement agreement and give up your claims, they’ll usually need to offer something meaningful to make it worth your while. If the offer is low or there’s no ex gratia element at all, that’s often a sign there’s room to negotiate, especially if you have potential claims. It’s worth getting advice before accepting.
If you’ve been offered an ex gratia payment, we’ll tell you whether it’s fair, whether it’s taxed correctly, and whether there’s room to push for more. We’re Darwin Gray, one of Wales’ leading employment law firms, advising on hundreds of settlement agreements a year. You’ll deal directly with your solicitor, and as the only firm in Wales offering full Welsh language employment advice at every level, we can help in Welsh or English.
Get a free, no obligation chat with our employment team. Call 02920 829 100 or use our contact form.
Settlement agreements for employees
Disclaimer: This guide is general information, not legal or tax advice, and the rules change. For advice on your situation, please speak to a qualified employment solicitor.
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