An organization, government, or insurance company makes an ex gratia payment to a person for damages or claims, but the party making the payment doesn’t have to admit fault.
An ex gratia payment is considered a gift because the person giving the money is not required to do so. “Ex gratia” means “by favor” in Latin.
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Learning About Ex Gratia Payments
Ex gratia payments differ from those required by law because they are not. Organizations, governments, and insurance companies usually only compensate victims if the law requires it. Since this is the case, ex gratia payments don’t happen very often.
In the case of an insurance company, if a policyholder gets hurt and the policy covers that injury, the insurance company is legally required to pay the claim. This kind of payment has to be made. It is a legal requirement, and most of the time, it comes with an admission of liability.
What is Ex Gratia Payment?
An ex gratia payment, on the other hand, is a sign of goodwill. This kind of payment is made after a specific loss or damage to property. An ex gratia payment does not mean you are responsible for the loss or damage. A company that gives its customers a one-time credit wouldn’t make an ex gratia payment because the credit isn’t for a specific loss. On the other hand, a company that gives a credit after a service outage would be considered to be giving a gift.
Ex gratia payments may be part of a longer-term plan for an organization to keep a good relationship with the person receiving the payment. For example, if a big store has to lay off many workers, it might give them more money than the law says they have to. The store may decide that this act of goodwill will lessen the bad press that will come from the layoffs. In the same way, British Airways often gives a free payment card to past customers who may have had trouble as a way to keep good relationships with them.
Things to think about
Most ex gratia payments in the U.S. are taxed by the federal and state governments. But in the U.K., ex gratia payments of less than £30,000 are not taxed as long as they are not for work done or services provided.
Even though the first £30,000 of an ex gratia payment to you is tax-free, taxpayers in the U.K. must tell Her Majesty’s Revenue and Customs (HMRC) about it at the end of the tax year to make sure they don’t have to pay income tax or national insurance on it.
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