What Is Ex Gratia Payment?

An ex gratia payment is made to an individual by an organization, government, or insurer for damages or claims, but it does not require the admittance of liability by the party making the payment. An ex gratia payment is considered voluntary as the party making the payment is not obligated to compensate the individual. In Latin, “ex gratia” means “from favor.”

Key Takeaways

  • Companies make ex gratia payments to parties that have experienced a loss to promote goodwill.
  • An ex gratia payment does not mean that the payer is admitting liability for a loss.
  • In the United States, ex gratia payments are exempt from tax.

Understanding Ex Gratia Payments

Ex gratia payments differ from legally mandated payments in that they are voluntary. Organizations, governments, and insurers will typically provide compensation to victims only if they are legally required to do so.

In the case of an insurance company, if a policyholder suffers an injury that is covered by the terms of the insurance policy, the insurer is obligated to pay. This type of payment is not voluntary. It is the result of a legal obligation, and it typically carries with it an admission of liability.

A company may make ex gratia payments in cases where the recipient has experienced a loss; however, such a transaction is not considered an admission of liability.

In contrast, an ex gratia payment is a gesture of goodwill. The payment is made following a specific loss or damage to property and does not carry with it any admission of liability. A company providing a one-time credit to its customers would not be considered to be making an ex gratia payment because the payment is not related to a specific loss. However, a company that provides a credit after a service disruption would be considered to be making an ex gratia payment.

An organization may use ex gratia payments as part of a longer-term strategy to maintain good relations with the individual receiving the payment. For example, a large retailer that is forced to reduce staff may provide a severance payment that is larger than the legal requirement. The retailer may determine that this gesture of goodwill will reduce the negative publicity generated by the layoffs.

Special Considerations: Taxability of Ex Gratia Payments

Ex gratia payments in the United States are typically subject to federal and state income taxes. However, in the United Kingdom, ex gratia payments under £30,000 are not taxable as long as the payment is not for work undertaken or services rendered; such a payment must be voluntary. 

According to British law, if a payment is voluntary, that makes the difference concerning taxability. However, ex gratia payments over £30,000 should be reported to HM Revenue and Customs to ensure there will be no unexpected tax liabilities in the coming year.

British Airways often gives an ex gratia/compensation payment card to past customers who may have been inconvenienced to maintain good customer relations.

Ex gratia payments and statutory redundancy payments are tax-free. Payment in lieu of notice, holiday pay, and normal contractual pay are not considered ex gratia payments and are subject to taxation.