Ex gratia pension payment

Ianboid

Hi, the company I work for are closing their final salary pension scheme.
They have made us an ex gratia offer as a sweetener.
They say it's taxable, I think it's not.
I stumbled across a ruling online stating that if it's under £30k it is
Exemt from tax and doesn't go down as taxable earnings.
Anyone have any idea ?

Dazed_and_confused

I have an idea.

You should share details of the ruling.

Ianboid

Payments that are made between an employer and employee are normally subject to tax as they will be described as ‘arising out of the contract of employment’ by HMRC. Ex-gratia payments are an exception to that rule and fall under a tax exemption from s.403 Income Tax (Earnings and Pensions) Act 2003 for any amounts under £30,000.00. This is because the payments made are not made for the work that has been undertaken or for a provision of services; they are a “voluntary” payment made by the employer.

squirrelpie

Google tells me that Ianboid is probably looking at http://www.redmans.co.uk/ex-gratia-payments-a-quick-guide-for-employees/ and has edited the extract he's posted by omitting the final part of the last sentence in the paragraph, which are 'and are “compensation for loss of employment”'. These words provide an indication that the paragraph is perhaps talking about a specific area of application of the law that is different to his circumstances.


I suggest consulting an employment solicitor or asking HMRC about the particular situation.

Thrugelmir

Imagine the abuse if companies could make ex-gratia payments of uo to £30k for currently employed persons.

mgdavid

Presuming there will be a replacement DC scheme, then couldn't the employer add it to normal salary as a bonus then put it into replacement DC pension under salary sacrifice?
Or just pay it into DC pension as an employers contribution?

xylophone

https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim02281



....many employers are closing, either entirely or solely to new members- their DBS in favour of a DCS. In addition, in order to encourage members (whether current or former employees) of the DBS:

to transfer the value of their benefits in the DBS into either a DCS scheme or some other registered pension arrangement of the member's choice; or
to give up some right under the DBS whilst remaining a member of it – for instance, giving up the right to future increases in the rate of pension payable by the DBS,

some employers are offering such members a cash payment. Employers (or former employers) may:

refer to such cash payments to in a variety of ways: cash inducement; “one- off” cash payment; ex-gratia payment; immediate cash sum; (additional) (cash) compensation payment; additional payment; and supplementary cash payment.

make the payment direct to a member (by cheque or bank transfer, for instance) or directly to a DCS scheme or some other pension arrangement of the member's choice.

However it is referred to, such a payment is:

earnings within the meaning of section 3(1)(a) (see NIM02010); and liable for Class 1 NICs under section 6(1) when paid direct to a member. In this respect, it makes no difference if the member is no longer, at the time the payment is made, an employee of the employer providing the DBS – see NIM02015.

But where the employer (or former employer) makes payment direct to an alternative registered pension scheme (see NIM02715):

the payment is disregarded in the calculation of earnings by virtue of paragraph 2(a) of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001
on the grounds that it is a payment to a registered payment scheme (see NIM02716).

If counted as earnings, then the ex gratia payment is taxable?

Apodemus

Thrugelmir wrote: »

Imagine the abuse if companies could make ex-gratia payments of uo to £30k for currently employed persons.

Next thing you know, Footballers will be getting loans instead of pay!

Ianboid

They have offered a substantial cash payment but say it is taxable.
They have also offered the same cash + 10% to put it in to avcs the old pension or the new one.
The think is, it puts nearly everyone in the super tax bracket.
My thoughts were ex gratia is and should be tax free.

Paul_Herring

My thoughts were ex gratia is and should be tax free.

From the link by xylophone, it's clear that what it's called doesn't matter, it's the intention behind it that does.

And it clearly this is 'bribe to get you out of the old scheme, while still employed' so it falls under regular remuneration and is taxed (or not, if put into a pension) as regular remuneration.

Silvertabby

I agree with Paul.

If it goes into your pocket it's taxed, if it goes into your pension fund it isn't.