Settlement agreements: what to check before you sign
The short answer: a settlement agreement is a contract where you agree not to take your employer to a tribunal, in return for money and other agreed terms. It’s only binding if you’ve had independent legal advice, which your employer usually pays towards. Before you sign, check four things: how the money is split for tax, when it’s paid, which claims you’re giving up, and what you’re agreeing to do after you leave.
What a settlement agreement is
Settlement agreements are used to end a job on agreed terms. They’re common in voluntary redundancy, when a performance or conduct issue is being settled, or when a dispute has started. Employers use them because they get certainty: once you sign, you generally can’t bring the claims listed in the agreement.
Your employer may raise it in a “protected conversation”. What’s said in that conversation usually can’t be used as evidence in an ordinary unfair dismissal claim, though that protection doesn’t apply if the employer behaves improperly, such as by bullying or putting undue pressure on you.
Your legal advice, and who pays
The law says the agreement isn’t valid unless you’ve had advice from a qualified independent adviser, usually a solicitor, who signs a certificate that’s attached to it. Employers almost always contribute to the cost:
- £500 plus VAT is a common contribution, and many solicitors now charge more than that for basic advice. You can ask for more, especially if the agreement is complicated or you want help negotiating.
- Paid directly to your solicitor, the contribution isn’t taxed.
- If you’re in a union, it may provide advice free.
The money: what’s taxed and what isn’t
This is where agreements are most often misunderstood. A headline figure is usually made up of several parts, and only compensation for losing your job is tax-free, up to £30,000:
| Package | Notice pay | Holiday pay | Compensation | Tax-free | Taxed | You keep |
|---|---|---|---|---|---|---|
| £25,000 | £0 | £0 | £25,000 | £25,000 | £0 | £25,000 |
| £45,000 | £12,000 | £2,000 | £31,000 | £30,000 | £15,000 | £40,734 |
| £70,000 | £18,000 | £3,000 | £49,000 | £30,000 | £40,000 | £55,578 |
In the middle example, the £45,000 package leaves about £40,734 after tax and National Insurance, not £45,000. Notice pay is always taxed as earnings, whatever the agreement calls it, so it can’t be renamed as compensation to make it tax-free. See pay in lieu of notice and is redundancy pay taxed for how each part works.
Look for a tax indemnity clause. Many agreements say that if HMRC later decides more tax was due, you have to repay it to your employer. That’s normal, but it’s another reason to check the split is right before you sign.
Clauses to check before you sign
| Clause | What to look for |
|---|---|
| Payment and timing | The exact amounts, and a fixed date for payment, such as within 14 or 28 days |
| Leaving date | When your job ends, and whether you work your notice or are paid in lieu |
| Claims you’re waiving | Which claims you give up. You keep the right to claim for personal injury you don’t know about yet and for pension rights already built up |
| Reference | An agreed wording attached to the agreement, so it can’t change later |
| Announcement | What colleagues and clients will be told about why you’re leaving |
| Confidentiality | What you can’t discuss. It can’t stop you reporting wrongdoing or crimes, or talking to the police, a regulator, a doctor or a lawyer |
| Restrictions after you leave | Limits on working for competitors or contacting clients, and how long they last |
| Clawback | Whether you must repay the money if you break the agreement |
| Pension | Any extra contribution, and confirmation that your built-up pension is unaffected |
| Company property | What you return, and whether you can keep your laptop or phone |
Negotiating a better deal
The first offer is often a starting point, especially if you have a potential claim or your employer wants a quick, quiet exit. Things that strengthen your position include a clear procedural mistake by your employer, a long notice period, or a strong record. Things worth negotiating apart from the headline figure:
- Paying part of the money into your pension, which saves tax and National Insurance on anything above £30,000. Our guide to redundancy and your pension shows the difference.
- A payment date after 6 April if the taxable part is large and you’re leaving near the end of the tax year.
- A higher contribution to your legal fees.
- An agreed reference and announcement.
- Keeping your bonus, share options or private health cover for a few months.
Time to think
There’s no legal deadline, but the Acas code of practice says you should normally get at least 10 calendar days to consider the agreement and take advice. If you’re given a much shorter deadline, ask for more time in writing. You don’t have to accept an offer. If you turn it down, your normal employment rights carry on, including any redundancy process your employer has to follow.
Work out what you’d get anyway
A settlement offer only makes sense next to what you’re already owed. Use the redundancy pay calculator for statutory redundancy pay, and our guide to redundancy pay for notice and holiday. If you’re deciding whether to volunteer at all, see should you take voluntary redundancy.
This is general information, not legal advice. You must get independent legal advice before signing a settlement agreement. Acas offers free, confidential guidance.
Common questions
What is a settlement agreement?
A legally binding contract between you and your employer. Usually you agree not to bring claims against them, such as unfair dismissal, in return for a payment and other agreed terms. It was called a compromise agreement before 2013.
Do I need a solicitor for a settlement agreement?
Yes. A settlement agreement is only binding if you have had independent legal advice on its terms and effect from a qualified adviser, usually a solicitor, who must be named in the agreement. Your employer normally pays towards the cost.
How much does an employer pay towards legal fees?
There is no legal minimum, but £500 plus VAT is common, and many solicitors now charge more for basic advice. You can ask your employer to increase the contribution. Paid directly to your solicitor, it is not taxed.
Is a settlement agreement payment tax-free?
Only part of it, usually. Compensation for losing your job, including redundancy pay, is tax-free up to £30,000. Notice pay, holiday pay, wages and bonuses in the agreement are taxed as earnings, with National Insurance.
How long do I have to sign a settlement agreement?
There is no legal deadline, but the Acas code of practice says you should normally have at least 10 calendar days to consider it and get advice. If you feel rushed, ask for more time in writing.