Ex-Gratia Payment Tax Calculator

What is an ex-gratia payment, and how is it taxed?

An ex-gratia payment is a sum your employer pays you on leaving that you are not contractually entitled to – typically a "thank you", goodwill, or negotiated compensation payment made on redundancy or as part of a settlement agreement, rather than something written into your contract. Genuine ex-gratia and other qualifying termination payments benefit from a valuable tax break: the first £30,000 is free of both Income Tax and National Insurance. This calculator splits a termination payment into its taxable and tax-free parts, separates out any Payment In Lieu of Notice (PILON), and estimates your income tax, employee National Insurance and your employer's National Insurance cost, using 2026/27 rules. It goes further than a general termination pay calculator by specifically handling the PILON split and the post-2020 employer NI charge on the excess, which are the two most common places people miscalculate what they will actually keep.

The first £30,000: what counts, and what does not

The £30,000 exemption (under section 401 of the Income Tax (Earnings and Pensions) Act 2003) applies to genuinely non-contractual, compensatory payments: ex-gratia sums, most redundancy pay (statutory and enhanced), and compensation for loss of office. It does not apply to sums you were contractually entitled to anyway – unpaid salary up to the termination date, accrued but untaken holiday pay, contractual bonuses, and PILON. Those are taxed in full as normal earnings, with normal Income Tax and both employee and employer National Insurance, exactly as if you were still being paid a salary. If a settlement includes several of these elements, only the genuinely ex-gratia/compensatory part is eligible for the £30,000 exemption – and if you also received a separate redundancy payment earlier in the same employment, the two are added together against a single £30,000 threshold, not treated as separate allowances.

PILON: always fully taxable since 2018

Payment In Lieu of Notice used to have some scope for tax-free treatment if your contract had no PILON clause. Since 6 April 2018, that loophole was closed: PILON is now always taxed and National-Insured as earnings, calculated using the Post-Employment Notice Pay (PENP) formula, regardless of whether your contract technically allows your employer to pay it in lieu of notice. In practice this means the part of a settlement that represents your notice pay should be identified separately and taxed in full – it cannot be folded into the £30,000 tax-free amount, however the payment is labelled in your settlement agreement.

Employer National Insurance on the excess above £30,000

Since 6 April 2020, the rules changed so that while the excess above £30,000 is still free of employee National Insurance, your employer must pay Class 1A National Insurance on that excess, at the standard employer NI rate – 15% in 2025/26 and 2026/27 following the Autumn Budget 2024 increase. This does not come out of your payment; it is an additional cost to your employer. It is still useful to understand, though, because in some negotiations the employer NI cost is factored into how much an employer is willing to offer in total.

Why your payslip might show more tax than you expect

Termination payments are frequently taxed more heavily at the point of payment than the figures above suggest, purely because of how PAYE handles a leaver. If your taxable excess or PILON is paid after your P45 has already been issued, many employers are required to apply an "0T" tax code on a non-cumulative (month 1) basis – meaning no Personal Allowance is given against that specific payment, and the whole amount is taxed as if it were a fresh, standalone slice of income at 20%/40%/45%. This can mean noticeably more tax is deducted at source than your true annual liability, particularly if the payment is made in a low-income month or early in the tax year. It is not usually a mistake by your employer; it is simply how the PAYE system is required to treat a payment after a P45 has gone out. If this happens to you, the fix is straightforward but easy to miss: at the end of the tax year, compare the tax actually deducted (shown on your final payslip and P45/P60) against what you would owe based on your total income for the year. Overpaid tax is refundable either automatically once HMRC reconciles your record, via a P800 calculation, or by claiming directly through your Personal Tax Account or a Self Assessment return if you complete one. Keep your final payslip and settlement agreement so you can evidence the figures if you need to query the deduction.

How the calculator works

Enter your other taxable income for the tax year (salary already paid before termination, plus anything else), the total termination/ex-gratia payment you are being offered or have received, and the PILON or other contractual amount included within that total (enter £0 if none). The calculator then:

• Separates the genuine ex-gratia amount from PILON
• Applies the £30,000 tax-free exemption to the genuine ex-gratia amount
• Calculates income tax on PILON and on the taxable excess, stacked on top of your other income at your marginal rate(s)
• Estimates employee National Insurance on PILON (none applies to the excess)
• Shows the employer's National Insurance cost on PILON and on the excess above £30,000

Worked example

Daniel earns £32,000 in salary before his redundancy date. His settlement agreement totals £45,000, made up of £5,000 PILON (his notice pay, paid as a lump sum) and £40,000 genuine ex-gratia compensation. The first £30,000 of the £40,000 ex-gratia amount is tax-free; the remaining £10,000 is taxed at his marginal rate, stacked on top of his £32,000 salary plus the £5,000 PILON – landing mostly in the 20% basic-rate band, with a slice in the 40% band. The £5,000 PILON is fully taxed and National-Insured as earnings. Overall Daniel keeps the large majority of the £45,000, with tax and employee NI eating into the PILON and the £10,000 excess, while his employer separately pays 15% employer NI on both the PILON and the excess.

Frequently asked questions

Is an ex-gratia payment tax-free?

The first £30,000 of a genuine ex-gratia or termination payment is usually tax-free and free of National Insurance. Anything above £30,000 is taxed as income at your marginal rate. This exemption only covers genuinely non-contractual, compensation-type payments – contractual payments like PILON, unpaid salary, bonus or holiday pay are taxed separately as normal earnings.

Is PILON included in the £30,000 tax-free amount?

No. Since April 2018, Payment In Lieu of Notice (PILON) is always taxed and National-Insured as normal earnings, whether or not your contract has a PILON clause. This is calculated using the Post-Employment Notice Pay (PENP) rules and sits outside the £30,000 exemption entirely.

Do I pay employee National Insurance on a termination payment over £30,000?

No employee National Insurance is due on the genuine ex-gratia excess above £30,000. However, since April 2020 your employer must pay Class 1A employer National Insurance on that excess, currently at 15%. This employer NI does not reduce what you personally take home.

What tax rate applies to the excess above £30,000?

The excess is added on top of your other taxable income for the tax year (salary already paid, PILON, and any other income) and taxed at your marginal rate – 20%, 40% or 45% in 2026/27 depending on which band the total falls into, plus a reduced Personal Allowance if total income exceeds £100,000.

Does redundancy pay count towards the £30,000 exemption?

Yes. Statutory redundancy pay and most enhanced or ex-gratia redundancy payments share the same £30,000 exemption as other genuine termination payments – they are not separate allowances. If you receive both redundancy pay and a separate ex-gratia sum, they are added together against the single £30,000 threshold.

Are holiday pay and bonus included in the £30,000 exemption?

No. Accrued but unpaid holiday pay, contractual bonuses and any other sums you were contractually entitled to are taxed as normal earnings in full, with normal Income Tax and employee/employer National Insurance, regardless of the £30,000 exemption.

Should I get advice before accepting a termination or settlement payment?

It is strongly recommended. Many settlement agreements deliberately label sums in ways that affect their tax treatment, and getting the PILON/ex-gratia split wrong can lead to an unexpected tax bill. Most settlement agreements require you to take independent legal advice before signing, and involving an accountant to check the tax split is also worthwhile for larger payments.

Sources: GOV.UK – Redundancy pay; GOV.UK – Income Tax rates and Personal Allowances; GOV.UK – National Insurance rates. The £30,000 exemption and PILON/PENP rules are set out in HMRC's Employment Income Manual.