Untaxed ex-gratia payment to retire early

Roy1234

My wife has been asked by her employer to retire two months ahead of her planned date, and in return accept an ex-gratia payment of £2,500. There are some office politics going on which I won't go in to. The employer says this payment won't be taxed, as it's ex-gratia. They want a letter from her agreeing to the earlier retirement date.

My question is, apart from the obvious risk that she could not receive the payment, would it really escape Tax & NI deductions, as it's going through her normal payslip?

Savvy_Sue

If it was a redundancy payment it would be untaxed and on payslip. Is it possible they're using that mechanism without the formal consultation?

I'm not saying that's the only explanation…

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81930082#Comment_81930082

It's not redundancy, that word has not been mentioned.

Markdavid1962

Ex-gratia payments can be tax free but they have to meet certain conditions, including early retirement but you have to meet certain conditions, eg like number of years of service

Depending on your wifes retirement date it may be easier to carry on working past April and resign when your wife is about to reach the £12,500 figure and claim the tax back she has already paid.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81930091#Comment_81930091

If she's going to draw a private pension soon, and get her state pension later this year, how would this benefit her?

Marcon

https://forums.moneysavingexpert.com/discussion/6660504/untaxed-ex-gratia-payment-to-retire-early

Your wife isn't being paid for work she's done (ie a contractual entitlement). She is being offered an ex gratia (ie voluntary) payment made by her employer as compensation for loss of employment.

Ex gratia payments come under a tax exemption from s.403 Income Tax (Earnings and Pensions) Act 2003 where the amount is under £30,000.

flaneurs_lobster

How much is 2 months net earnings?

I'd ask for £5k, just to see how keen they were to get rid of me.

Undervalued

https://forums.moneysavingexpert.com/discussion/comment/81930128#Comment_81930128

Yes.

However such payments are normally made under a formal settlement agreement (which used to be callled a compromise agreement) or covered by a COT3 agreement arranged by ACAS. Without such an agreement the employer is leaving themselves wide open to the employee taking the money then still making an employment tribunal claim for unfair dismissal etc.

A less formal "agreement to take the money and go quietly" would not be legally binding on the employee!

Arguably this doesn't matter to the OP's wife if she is happy with what is on offer. It may be that the employer is choosing to trust to luck and save the legal costs of doing it properly.

Assuming HMRC accepts that this is an ex-gratia severance payment and not a contractual entitlement then yes, up to £30K is tax free.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81930485#Comment_81930485

We're aware of how settlements work, in some respects an ex-gratia payment seems a lesser version, but as you say without the contractual aspect, negotiated payment, NDA required from the leaver etc. I have warned her that her employer might slap some kind of agreement to sign on her at a later stage, to give them some such protections, waiver against Employment Tribunal rights etc, as in 'you'll only get your ex-gratia payment if you sign here' kind of thing.

It's a thoroughly toxic office environment, the worst she's seen in a lifetime's work (and she's known some pretty shocking stuff elsewhere) and she has let them know before now that she has her resignation pre-written out, she's so fed up with them. With new staff coming, I think they want to get her out of the way early, having (quite correctly) accused them of bullying and indirectly of age discrimination. She has no intention of taking any Employment Tribunal route this late, and as she was close to quitting early voluntarily, the offer of a payment to go sooner is very welcome. It was preceded by a very uncharacteristic verbal apology from the problem manager in the presence of her ineffective boss. It make us wonder if they've been given legal advice to do so. It's not a generous company in any respect, £2.5k is quite out of character, but perhaps they've been advised it's cheaper than a settlement agreement or risking an ET?

It seems from posts so far that she need not fear Tax or NI being levied. My only fear is that a nasty company 'could' not pay her off as promised. I am wondering if she should request a written offer of the ex-gratia payment before resigning, if that isn't a contradiction in terms, or else if she should state in her resignation letter that she expects the £2.5k as discussed?

Undervalued

https://forums.moneysavingexpert.com/discussion/comment/81930530#Comment_81930530

I'm not a tax expert but I don't fully agree with the first sentence of your last paragraph. She would be wise to have some evidence that the £2.5K is ex-gratia and not either a contractual entitlement or payment for work done in case HMRC come looking

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81930561#Comment_81930561

Yes I was uncomfortable myself in referring to something voluntary as if expected. Early retirement can be accompanied by ex-gratia payments from what I've read elsewhere, but it's sounding like they really need to give her a letter stating that lest, as you say, the HMRC ask questions. I suppose she could ask for that letter before handing them the resignation they requested?