Claims for ex-gratia payments (Referred to in paragraph 13.1) Step Action… 1 Claim received acknowledge receipt. Ex gratia payments, made where the employer is under no legal obligation to do so, and awards from the Employment Tribunal in respect of wrongful or unfair dismissal, can fall within the £30,000 exemption as can payments made on redundancy whether statutory, non-contractual or even contractual. Ex-gratia payment made voluntarily by an employer is not taxable as ‘profits in lieu of salary _____ 24 December 2015 Background Section 17(3) of the Income-tax Act, 1961 (the Act) brings certain payments such as profits in lieu of salary within the ambit of ‘income from salaries’. This is also known as an ex-gratia payment. because retirement is not tax free, HMRC will not see it as ex gratia but a reward for past services is my understanding of it, the older the director the harder it will be. Once you have reached the £30,000 ceiling for any combination of these payments and/or an ex-gratia payment, you will have to pay tax. What about pension contributions? This payment should be treated as pay if it is more than either: the basic exemption and increased exemption (if due) Standard Capital Superannuation Benefit (SCSB). 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. 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. Ex Gratia payment to employee upon retirement, Explore our AccountingWEB Live Shows and Episodes, View our 2020 Accounting Excellence Firm Awards Finalists, The TaxCalc Survival Guide to Self Assessment, The ultimate guide to starting up in practice, Payroll and Covid: Growth and profit opportunities, How accountants can save time with content hubs, Sunak unveils lockdown grants worth up to £9,000. A payment that is taxable under ITEPA 2003, s403 can be taken into account as relevant earnings for the purposes of retirement annuity contracts [ICTA 1988, s623], but not for personal pension plans [ICTA 1988, s644(4)(b))]. The payment is certainly not contractual but I am not certain whether the £30,000 tax free concession only applies to compensation for loss of office when it is the employer's decision to terminate the employment, not the employees. The new rules for the tax and Class 1 National Insurance contributions (NIC) treatment of termination payments took effect from 6 April 2018. (‘Compensation’ payments must be awarded by a court). Formal approval for this is required from IR Savings Pensions Share Schemes in Nottingham. Payments made by one or more associated employers are aggregated and set against the exemption [ITEPA 2003, s404]. While allowing deduction under Section 37(1) of Income Tax Act to the assessee, Prathamik Shikshak Sahakari Bank Ltd, the Pune bench of the ITAT held that ex-gratia payment made to the retiring employees in recognition of their services are “profits in lieu of … Perhaps it is worthwhile for HM Revenue & Customs to have a rethink on this matter and reinstate this concession but keep the lump sum at a modest level of say £5,000. Unfortunately this may lock in most of the capital, and so may be favoured more if you are nearing your retirement. record claim. Do I have to declare this income and if so, how should it be classified to avoid payment of tax. 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 and are “compensation for loss of employment”. This changed the rules relating to what are now termed registered pension schemes. Where was the announcement?I can't find it in the What's new or news release sections of the HMRC website (unless I've missed it). Immigration Enforcement, UK Visas & Immigration and Border Force make ex-gratia payments to customers, beyond any legal or statutory requirements, as redress for maladministration. 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