The recent story of Manchester United manager Jose Mourinho being given the red card and paid £15 Million for essentially failing a major company (Manchester United) has put ex-gratia payments back on the agenda for conversation.
So, what is an ex-gratia payment?
An ex-gratia payment is a sum of money paid to an employee by an employer in a situation where the employer is not obligated to do so.
Ex gratia payments are, therefore, gestures of goodwill on behalf of the employer, sometimes referred to as a golden handshake. These payments are commonly made in a retirement, redundancy and dismissal scenario.
The key feature of an ex gratia payment is that there is no contractual obligation on the employer to make the payment to the employee. Moreover, unlike with statutory redundancy pay, there is no limit on how much an ex-gratia payment can be.
Why would an employer consider making an ex-gratia payment?
The answer can be one of several reasons. It could be to mutually end someone’s employment due to performance, business needs, or to prevent post-employment legal action, all of which could be drafted into a settlement agreement or other formal document. When trying to settle someone’s employment and effectively terminate their employment in tricky situations, this discretionary payment is usually negotiated.
To conclude, the first £30,000 of an ex-gratia payment is tax free, any figure over and above that amount would be subjected to HMRC deductions. Jose will therefore have to pay tax on £14,970,000 of his payment!