For no NICs liability to arise, any ex-gratia payment must not
be “earnings”. See
NIM02010 for guidance on the meaning of
“earnings”. To consider the payment to be ex-gratia
there must be no legal or contractual obligation on the employer to
pay it.
However, even if the employee has no legal or contractual
right to the payment it will still be earnings for NICs purposes if
the payment can be held to derive from the employment.
In line with the principle established in Hamblett v Godfrey
(See SE00690) a payment will derive from the employment if it
arises out of the employment and for no other reason. That is, if
the payment is made because of the employment rather than for any
other reason. For example, in the case of a retiring employee where
the payment is made in recognition of the length of service of the
employee and not as a personal gift from the employer.
If an employer uses the term “ex-gratia” to
describe a compensatory payment made for loss of office see
NIM02140 for general guidance on the
meaning of ‘ex-gratia’.
If a company is making a payment to a departing director, you
should carefully check the circumstances of the payment. If the
company describes the payment as compensation for loss of office
see
NIM02510. See also
NIM02140 for general guidance on
ex-gratia payments and make enquiries to establish:
