Does an ex gratia payment affect your personal allowance?

dharm999

I have looked and have seen conflicting info.  If you get an ex gratia payment that takes your income including the ex gratia payment over £100k, do you lose some of your personal allowance?  I understand the ex gratia payment is probably tax free, but wasn't sure of the impact on your personal allowance, if it took you over £100k.  Ca anyone shed light on this, or give me a link to somewhere that clarifies this for me

Thanks

Grumpy_chap

What is the nature of the ex-gratia payment and why do you think it would be tax free?

dharm999

Paid as part of a settlement agreement for loss of office.

Marcon

dharm999 said:

I have looked and have seen conflicting info.  If you get an ex gratia payment that takes your income including the ex gratia payment over £100k, do you lose some of your personal allowance?  I understand the ex gratia payment is probably tax free, but wasn't sure of the impact on your personal allowance, if it took you over £100k.  Ca anyone shed light on this, or give me a link to somewhere that clarifies this for me

Thanks

Depends how much it is. Normally only (up to) £30K may be paid tax free, although there are some exceptions such as contributions to a registered pension scheme (albeit with some conditions attached). Plenty of info on google from various firms of solicitors if you google on your question eg https://www.lloyddonnelly.co.uk/employment-law/ex-gratia-payments.html

If you are signing a settlement agreement, the person best placed to help you is the lawyer advising you on your agreement - and hopefully your employer is paying for that advice.

dharm999

Thanks, unfortunately the link doesn’t help me with my query.  The payment will be 30k, and that added to my normal salary, bonus, benefits in kind and interest will take me over 100k for the year, but excluding it, wouldn’t, so I need to understand that.  Employer will pay for a lawyer to review the settlement agreement, but it’s only a small amount, so won’t get advice on tax as part of that.  

Dazed_and_C0nfused

dharm999 said:

Thanks, unfortunately the link doesn’t help me with my query.  The payment will be 30k, and that added to my normal salary, bonus, benefits in kind and interest will take me over 100k for the year, but excluding it, wouldn’t, so I need to understand that.  Employer will pay for a lawyer to review the settlement agreement, but it’s only a small amount, so won’t get advice on tax as part of that.  

It's either taxable income or it isn't.  You need to establish this with your employer.  Ultimately they must know otherwise they wouldn't be able to comply with their Real Time Information (PAYE) reporting obligations to HMRC.

If it's taxable income it's also part of your adjusted net income, which is what determines your Personal Allowance.

If it's not taxable income then it wouldn't be part of your adjusted net income.

dharm999

It won’t be classed as taxable income, so the £100k threshold won’t be an issue.

Thanks

Undervalued

dharm999 said:

Thanks, unfortunately the link doesn’t help me with my query.  The payment will be 30k, and that added to my normal salary, bonus, benefits in kind and interest will take me over 100k for the year, but excluding it, wouldn’t, so I need to understand that.  Employer will pay for a lawyer to review the settlement agreement, but it’s only a small amount, so won’t get advice on tax as part of that.  

But it is not "added to your salary" (despite probably being paid via the normal payroll) as it is not part of your contract. It is either compensation for the loss of your employment or more likely a payment made "without admission of liability".  So assuming it is below £30K and is genuinely what I have described (and not some attempt to avoid tax) then it should make no difference at all.

dharm999

Thanks.  Ok, so not taxable income and excluded when working out if above £100k.

Marcon

dharm999 said:

Thanks, unfortunately the link doesn’t help me with my query.  The payment will be 30k, and that added to my normal salary, bonus, benefits in kind and interest will take me over 100k for the year, but excluding it, wouldn’t, so I need to understand that.  Employer will pay for a lawyer to review the settlement agreement, but it’s only a small amount, so won’t get advice on tax as part of that.  

I think you'll find it answers your query - and you did ask for a link. Up to £30K can be tax free so why are you suggesting it should be added to your taxable earnings?

Asking your lawyer to confirm this isn't tax advice; it's simply confirming something with which they should be fully familiar.