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HMRC internal manual

National Insurance Manual

NIM02610 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Ex gratia payments made to retiring employees/directors

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 orcontractual obligation on the employer to pay it.

However, even if the employee has no legal or contractual right to the payment it willstill be earnings for NICs purposes if the payment can be held to derive from theemployment.

In line with the principle established in Hamblett v Godfrey (See SE00690) a payment willderive 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 otherreason. For example, in the case of a retiring employee where the payment is made inrecognition of the length of service of the employee and not as a personal gift from theemployer.

If an employer uses the term “ex-gratia” to describe a compensatory payment madefor loss of office see NIM02140 for general guidance on themeaning of ‘ex-gratia’.

If a company is making a payment to a departing director, you should carefully check thecircumstances of the payment. If the company describes the payment as compensation forloss of office see NIM02510. See also NIM02140for general guidance on ex-gratia payments and make enquiries to establish:

  • what happened to the director’s normal remuneration and if the director did not get it, why not?, and
  • how the payment is made up. Does it bear any relationship to distribution of profits?