Ex Gratia Payments in Redundancy: What UK Employers Should Know

Redundancy is rarely straightforward for small businesses.

Even when you’re confident there’s a genuine redundancy situation, the process can still feel stressful - especially when you’re trying to protect your team culture, manage costs, and reduce the risk of claims.

That’s where an ex gratia payment in redundancy sometimes comes in. Done properly, it can help you reach a clean, respectful exit and give your business more certainty. Done badly, it can create confusion about what you’re paying for, how it’s taxed, and whether you’ve accidentally set a precedent you can’t sustain.

Below, we break down what an ex gratia payment is, why employers use them, how they interact with statutory redundancy pay and notice, and the key legal and tax issues to think about before you put an offer on the table.

What Is An Ex Gratia Payment In Redundancy?

An ex gratia payment is a discretionary payment you offer an employee that you’re not legally required to pay.

In a redundancy context, this usually means a lump sum offered on top of what the employee is already entitled to (for example statutory redundancy pay and notice pay).

Common Names You’ll Hear

You might see ex gratia payments described as:

• Enhanced redundancy pay
• Discretionary redundancy payment
• Goodwill payment
• Compensation payment (be careful with this wording - it can have legal/tax implications)

They all broadly point to the same idea: you’re choosing to pay more than the legal minimum.

Ex Gratia vs Statutory Redundancy Pay (They’re Not The Same)

It’s important to separate:

• Statutory redundancy pay - the minimum payment certain eligible employees are entitled to by law (generally based on age, length of service and weekly pay, subject to statutory caps).
• Contractual redundancy pay - if the employee’s contract or policies promise an enhanced redundancy formula, that “enhancement” may actually be a legal obligation, not ex gratia.
• Ex gratia payment - the additional amount you offer without a legal obligation, usually to support a settlement and reduce risk.

If you’ve promised enhanced redundancy in the Employment Contract or a clear policy, it may be contractual - meaning you can’t later call it “ex gratia” just because you’d prefer it to be discretionary.

Why Would A Small Business Offer An Ex Gratia Payment In Redundancy?

If you’re running a small business, every pound matters - so paying “extra” can feel counterintuitive.

But there are situations where offering an ex gratia payment in redundancy is a practical business decision because it can buy you:

1) Certainty And A Cleaner Exit

The biggest reason employers offer an ex gratia payment is to reach an agreement where the employee waives certain legal claims (usually via a settlement agreement).

That doesn’t mean you can skip a fair redundancy process - you still need to do things properly - but a well-structured exit can reduce the risk of a dispute dragging on for months.

In practice, this is typically documented in a settlement agreement. (In some situations, a deed may be used, but settlement agreements are the usual route for settling employment claims.)

2) Faster Resolution (When Time Is A Factor)

Sometimes the business needs to restructure quickly due to cash flow, loss of a key client, a site closing, or a change in technology.

While you still need to consult and follow a fair process, an ex gratia payment can help facilitate a quicker, more predictable outcome - particularly where there’s disagreement about selection, scoring, or alternative roles.

3) Protecting Reputation And Staff Morale

Small businesses often rely on word-of-mouth recruitment, local reputation, and tight-knit teams.

Handling redundancies respectfully can make a big difference to:

• your remaining team’s trust in management
• online reviews (especially in customer-facing industries)
• how ex-employees speak about your business and culture

4) Avoiding A “Nibbling Away” Dispute Over Small Sums

Sometimes the legal minimum payment is correct - but the employee disagrees, feels blindsided, or is threatening a grievance.

A carefully framed ex gratia payment can be commercially sensible if it avoids legal spend, management time, and uncertainty.

That said, you should always sense-check whether the “extra” payment is actually masking a process problem. If the redundancy process isn’t fair, paying ex gratia doesn’t magically fix the underlying legal risk.

What Are You Legally Required To Pay In Redundancy (Before Ex Gratia)?

Before you decide whether to offer an ex gratia amount, you’ll want clarity on what you must pay anyway.

In most redundancy exits, the core payments to consider include:

• Statutory redundancy pay (if eligible)
• Notice pay (statutory or contractual notice, whichever is greater)
• Accrued but untaken holiday pay
• Any contractual entitlements (for example commission, bonuses, expenses, or benefits depending on the contract wording)

Don’t Treat Ex Gratia As A Substitute For Notice Or Holiday Pay

This is a common pitfall.

Notice pay and holiday pay are typically contractual/statutory entitlements. If you roll those into a single “ex gratia” figure, you risk:

• confusing the employee (and increasing the risk of dispute)
• misstating tax treatment (which can create payroll and HMRC issues)
• creating arguments later that you didn’t pay correct notice/holiday

If you’re offering pay in lieu of notice, document it clearly and make sure your contract supports it. Many businesses handle this via a clear clause and a properly drafted termination letter, such as a termination letter approach that itemises what’s being paid and why.

You Still Need A Fair Process

Even if you plan to offer an ex gratia payment, you should still run a fair redundancy process. That usually means:

• confirming there’s a genuine redundancy situation (role no longer needed, workplace closure, reduced requirement for work, etc.)
• consulting with affected staff (including exploring alternatives)
• using fair selection criteria where you’re selecting from a pool
• considering suitable alternative employment

The required process can vary depending on numbers, timing, and your specific circumstances. For example, where larger numbers of redundancies are proposed, collective consultation rules may kick in.

Even for smaller-scale redundancies, it’s worth understanding the general expectations around redundancy consultation and how consultation affects fairness.

If you’re unsure, getting tailored advice early can save a lot of pain later - particularly if there’s any risk of discrimination, whistleblowing allegations, pregnancy/maternity issues, or disability-related absence in the background.

How Should You Structure An Ex Gratia Payment Redundancy Offer?

The wording and structure matter more than most employers expect.

If you’re making an ex gratia redundancy offer, it’s usually best to separate the payments into categories so it’s clear what is:

• statutory/contractual (owed regardless), and
• discretionary (paid only if the employee agrees to the settlement terms)

A Practical Example Of How Employers Often Break It Down

You might set out payments like:

• Statutory redundancy pay: £X
• Notice pay (or PILON): £X
• Accrued holiday pay: £X
• Ex gratia payment: £X

This kind of structure helps reduce arguments and helps your payroll team apply the correct tax treatment to each component.

Should The Ex Gratia Payment Be Conditional?

Often, yes.

Most businesses only offer an ex gratia payment if the employee signs a settlement agreement (and complies with related obligations like confidentiality and returning company property).

This is where careful drafting matters - because if you pay the ex gratia amount unconditionally, you may have effectively paid extra without receiving the legal protection you thought you were buying.

In many situations, it’s also wise to include clear post-termination protections (where appropriate), such as confidentiality obligations. These protections need to be tailored - especially if the employee had access to sensitive business information, customers, pricing, or strategy.

Be Careful About Setting A Precedent

If you offer ex gratia payments to some employees but not others, or you follow a pattern over time, you may create:

• expectations among staff (which can damage morale if later redundancies are handled differently)
• arguments that an “enhanced redundancy scheme” exists as a matter of custom and practice
• inconsistent treatment that increases discrimination risk (if the pattern correlates with a protected characteristic)

This doesn’t mean you can’t offer ex gratia payments - it just means you should be consistent and document why you’ve chosen a particular approach.

Tax And Payroll: How Are Ex Gratia Redundancy Payments Taxed In The UK?

Tax is one of the most searched parts of ex gratia payments in redundancy - and also one of the easiest places to make an expensive mistake.

In the UK, redundancy-related termination payments can fall into different tax categories, and the label you give a payment isn’t always decisive. HMRC generally looks at what the payment is for.

The Common Rule People Have Heard: The £30,000 Exemption

Many employers have heard that the first £30,000 of a termination payment can be paid tax-free.

In broad terms, under UK tax rules, certain genuine termination payments can benefit from a £30,000 income tax exemption, but:

• it does not automatically apply to everything paid on termination, and
• different elements (like wages, holiday pay and amounts treated as notice pay) can be fully taxable even if paid at termination.

Notice Pay Is A Common Trap (PENP)

Payments that are effectively notice pay are usually taxable as earnings.

HMRC has rules around Post-Employment Notice Pay (PENP) which can mean that, depending on how the termination is structured, part of a termination package may be treated as taxable notice pay even if you describe it as ex gratia.

This is one reason it’s so important to itemise and describe payments correctly in your paperwork and ensure payroll applies the right treatment.

National Insurance (NIC) Considerations

Whether employee/employer National Insurance applies can depend on how the payment is categorised.

As a small business, you don’t want a situation where:

• you treat something as NIC-free, but HMRC later says it was earnings, or
• you over-deduct and the employee disputes the calculation, delaying settlement.

Because the correct tax treatment depends on the structure of the exit package, it’s worth getting both legal and payroll/accounting input before you finalise numbers.

Practical tip: avoid making promises about “tax-free” payments in writing unless you’re confident the structure supports it. A safer approach is to say payments will be made “subject to deductions required by law”.

Note: this section is general information only and isn’t tax advice. Tax treatment can change and can depend heavily on the facts, so take payroll/accounting advice (and check HMRC guidance) for your specific package.

Key Legal Risks And Best Practices For Employers Offering Ex Gratia Payments

An ex gratia payment can reduce risk, but it can also create new risk if you’re not careful.

1) Unfair Dismissal And Process Challenges

If an employee has 2+ years’ service, they may be able to bring an unfair dismissal claim if the redundancy process was not fair.

An ex gratia payment doesn’t prevent that claim unless you reach a valid settlement agreement (with independent legal advice for the employee). Even then, not every type of claim can be settled in the same way, and settlement wording needs to be carefully drafted.

This is why employers often treat the ex gratia amount as the “consideration” for settling claims - but the paperwork has to be right.

If you’re building a redundancy plan and want to reduce risk from the start, it can help to speak to a lawyer about Redundancy Advice before you start meetings and scoring.

2) Discrimination Risk (Even With Redundancy)

Redundancy is one of the most common contexts where discrimination allegations arise, because selection decisions can be subjective or data-driven in a way that disproportionately affects certain groups.

For example, selection criteria based on absence can be risky where absences relate to disability, pregnancy, or other protected issues.

If there is any sensitivity around protected characteristics, it’s especially important that:

• your selection criteria are objective and measurable where possible
• you can evidence consultation and consideration of alternatives
• you don’t treat an ex gratia payment as “hush money” (that framing can backfire)

3) Confidentiality, IP, And Company Property

If you’re offering extra money, you may want comfort that the employee will:

• return laptops, phones, keys, and documents
• not share confidential information
• not take customer lists or sensitive business data

These obligations can be included in settlement documentation, but they should be consistent with what you can reasonably enforce.

4) Getting The Documentation Right (And Not DIY’ing It)

One-size-fits-all templates can be a false economy here.

Settlement documentation needs to reflect:

• the redundancy context (including process steps already taken)
• how payments are categorised for tax purposes
• the specific claims being settled
• any agreed reference wording (if relevant)
• confidentiality and return-of-property obligations

If your offer is being documented outside a settlement agreement, you may still need a clear contractual framework (for example, a deed) so the obligations are enforceable.

5) Communicating The Offer Clearly

How you communicate an ex gratia payment matters.

A calm, clear explanation is usually best:

• confirm what’s legally owed (statutory/contractual)
• confirm what’s discretionary and why you’re offering it
• set out the steps and timing (including any deadline, if appropriate)
• avoid anything that sounds like pressure or threats

If the employee feels rushed or bullied, it can sour negotiations and increase the likelihood of legal escalation.

Key Takeaways

• An ex gratia payment in redundancy is a discretionary payment you’re not legally required to make, usually offered on top of statutory and contractual entitlements.
• Before offering an ex gratia payment in redundancy, you should be clear on what you must pay anyway (statutory redundancy pay, notice pay, holiday pay and any contractual entitlements).
• Ex gratia payments are commonly used to support a settlement and reduce the risk of disputes, but they don’t replace the need for a fair redundancy process.
• Tax treatment can be complex - especially around notice pay and HMRC’s PENP rules - so itemising and documenting each payment category is crucial.
• Be consistent in your approach to avoid setting unintended precedents and to reduce discrimination risk.
• Don’t rely on generic templates for redundancy exits involving ex gratia payments; the documentation needs to be tailored to your business and the specific situation.

If you’d like help offering an ex gratia payment as part of a redundancy process (or you just want to sense-check your approach before you start consultations), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.