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HMRC internal manual

National Insurance Manual

Class 1 NICs : Earnings of employees and office holders : Ex-gratia payments

The term ‘ex-gratia’ should only be used in relation to a payment the employer makes when under no legal or contractual obligation to do so. When this applies, there is no liability for NICs on the amount involved if

  • the employee cannot expect to receive it - because it is not common practice for the employer to make such payments in similar circumstances
  • it is unconnected with the services which the employee provides in respect of the employment; and
  • it is not made because the individual is an employee.

An example of a payment which could be described as ‘ex-gratia’ would be where an assembly-line worker serves in an unpaid capacity as the secretary of the works sports club and unexpectedly receives a one-off payment from the employer in recognition of the valuable service they have given the club.

This would be an ex-gratia payment because there is no obligation requiring it to be paid. It will, therefore, satisfy the first two bullets detailed above. It will not, however, meet the requirements of the final bullet, and will not escape liability for NICs, as the payment is made because the individual is an employee and for no other reason. It would not have been paid to the individual if he had not been in the employment of the employer concerned. The payment derives from the employment and is “earnings” for NICs purposes.

Following the decision in Hamblett v Godfrey it is likely that very few payments referred to as ‘ex-gratia’ will not be liable for NICs. They will only escape liability if it can be accepted that there was some reason other than the existence of the employment which led to them being paid.

See NIM02010 for general guidance on the meaning of “earnings”.

For guidance on ‘ex-gratia’ payments made to employees/directors on leaving a company see NIM02610 and NIM02620.

Be careful if a payment to a director of a small company is described as ‘ex-gratia’. If the director receives such a payment while in office, it is unlikely that you can accept the payment as anything other than earnings.

Before reaching any conclusion you must find out:

  • the reason behind the payment
  • what happened to the normal remuneration (salary, fees, bonuses)
  • if the company is paying normal remuneration and, if not, why not
  • why the company regard the payment as ex-gratia
  • if only selected directors get these payments, why the others are treated differently.