I can't seem to set up a tax free ex gratia payment for an employee, I have followed all the help guidlines by setting up a pay type but none of them give me the option?

Welcome to the Community space, @Payford. I'm here to answer your questions one at a time and ensure that any ex gratia payments made to your employee are properly recorded.

As mentioned above, you’ll want to utilize the reimbursement pay type for non-taxable when setting up an additional payment for your employee. You can then adjust the non-taxable after-tax deduction for deductions. See this article for more details: Add or customise payroll deductions in QuickBooks Standard Online Payroll.

Moreover, payments made by an employer to an employee are usually taxed because HMRC will classify them as "arising out of the contract of employment." However, ex gratia payments are an exception to this norm and are tax-free under Section 403 of the Income Tax (Earnings and Pensions) Act of 2003 for sums under £30,000.00. This is due to the fact that these are voluntary payments provided by the employer as compensation for loss of employment, not for the work that has been completed or for the provision of services. You’ll want to read through this link for more information about the policy: Income Tax and National Insurance contributions: treatment of termination payments.

To avoid an unforeseen tax obligation in the upcoming year, any ex-gratia payment over £30,000.00 should be disclosed to the Inland Revenue. For more insights, please head to this link: HMRC National Insurance Manual.

Let me know how everything turns out by commenting below. I'm always around whenever you have follow-up payroll concerns or tax questions in QuickBooks. Take care.