What is a settlement agreement?▾
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between an employer and employee that typically ends the employment relationship in exchange for a financial payment. The employee agrees to waive their right to bring future claims against the employer. It must be signed by an independent legal adviser to be valid.
How much should I get in a settlement agreement?▾
There is no fixed formula, but typical settlement agreements include statutory redundancy pay (if you have at least 2 years' continuous service and the role is genuinely redundant), notice pay, accrued holiday pay, and an ex-gratia payment ranging from one to six months' salary depending on the circumstances. The total depends on your length of service, the reason for termination, and your negotiating position.
Do I qualify for statutory redundancy pay in a settlement agreement?▾
Statutory redundancy pay is only due if your role is genuinely redundant and you have at least 2 years' continuous service with the employer. With less than 2 years there is no statutory redundancy entitlement at all, although you are still owed your notice pay and accrued holiday pay, and you can still negotiate an ex-gratia sum. Where you do qualify, the calculation uses weekly pay capped at £751 and a maximum of 20 years' service, so the statutory maximum is £22,530.
Is a settlement agreement tax-free?▾
Not entirely. The first £30,000 of a genuine termination payment is free of income tax and National Insurance, but that exemption only covers statutory redundancy pay and genuine ex-gratia compensation for loss of office. Notice pay (whether worked, paid in lieu, or treated as post-employment notice pay) and accrued holiday pay are contractual earnings, so they are always taxable through PAYE and subject to National Insurance and never sit inside the £30,000 exemption. Anything above £30,000 in the termination element is taxable as income (employer National Insurance is also due on the excess).
Do I need a solicitor for a settlement agreement?▾
Yes. By law, a settlement agreement is only valid if the employee has received advice from an independent legal adviser (usually a solicitor) about the terms and effect of the agreement. Most employers contribute between £350 and £500 plus VAT towards solicitor fees as part of the settlement.
How long do I have to consider a settlement agreement?▾
ACAS recommends employers give employees at least 10 calendar days to consider a settlement agreement. In practice, this period can be extended by agreement. You should not feel pressured to sign quickly and should use this time to take legal advice.
Can I negotiate a settlement agreement?▾
Yes, settlement agreements are negotiable. The initial offer is rarely the final amount. Factors that strengthen your position include long service, potential discrimination or unfair dismissal claims, and the inconvenience of the termination. A solicitor can advise on realistic counter-offer amounts.
What is an ex-gratia payment?▾
An ex-gratia payment is a voluntary payment made by the employer that is not contractually required. In settlement agreements, this typically represents genuine compensation for loss of office. Because it is not earnings, it qualifies for the £30,000 termination payment exemption (shared with any statutory redundancy pay), which makes it the most tax-efficient element of the package. Contractual sums such as notice pay, holiday pay and bonuses cannot be relabelled as ex-gratia to make them tax-free.
What happens to my pension in a settlement agreement?▾
Your pension rights should be addressed in the settlement agreement. Typically, employer pension contributions continue until the termination date. Some agreements include an additional pension contribution in lieu of notice. Your solicitor should check that pension clauses are properly drafted.
Can I claim benefits after signing a settlement agreement?▾
You may be able to claim Universal Credit or Jobseekers Allowance after a settlement agreement, but the payment may affect your eligibility or the amount. There may be a waiting period if you received a large payment. Contact your local Jobcentre Plus for specific guidance.
What is a post-termination restriction in a settlement agreement?▾
Many settlement agreements include restrictive covenants that limit what you can do after leaving. These may include non-compete clauses (preventing you from working for a competitor), non-solicitation clauses (preventing you from approaching clients), and confidentiality obligations. Your solicitor should review these carefully.