What Is an Ex Gratia Payment?
An ex gratia payment is a voluntary payment made by an organization, government, or insurer to an individual for damages or claims. Unlike a legally-mandated payment, ex gratia payments do not require the party making the payment to admit liability. The term “ex gratia” translates to “by favor” in Latin.
Key Takeaways
- An ex gratia payment is voluntary and does not imply liability on the part of the payer.
- In the U.S., ex gratia payments are usually subject to federal and state income taxes.
Understanding Ex Gratia Payments
Ex gratia payments are distinct from legally-mandated payments as they are discretionary. Typically, organizations, governments, and insurers only compensate victims when required by law, making ex gratia payments relatively uncommon. For instance, insurance companies must pay claims for covered injuries as obligated by the insurance policy, which differs from voluntary ex gratia payments.
An ex gratia payment is a goodwill gesture made by a company after a specific loss or damage, without admitting liability, setting it apart from legally obligated payments. For instance, providing a credit to customers for a service disruption constitutes an ex gratia payment. Such payments can also serve as a strategic tool for organizations to foster positive relations with recipients, as seen in retail severance packages that exceed legal requirements or British Airways’ gestures to maintain customer loyalty.
Special Considerations
In the U.S., ex gratia payments are typically subject to federal and state income taxes. Conversely, in the United Kingdom, ex gratia payments under £30,000 are tax-free if not related to work or services rendered.
In the UK, the initial £30,000 of an ex gratia payment is tax-free, but taxpayers must inform HMRC to avoid additional taxes. Compliance ensures that the payment remains tax-exempt at year-end.