TRW & Co · Employment law
How Much Should a Settlement Agreement Pay?
In a settlement agreement how much you receive depends on what you are already owed, the value and strength of the claims you are giving up, and the cost and risk of a tribunal for both sides. Tax then shapes the net figure: up to £30,000 of genuine compensation can be tax-free, but notice pay is taxed in full.
Key pointFrom 1 January 2027 the unfair dismissal compensation cap disappears, so the same exit can be worth materially more depending on whether the effective date of termination falls before or after that date.
At a glance
No statutory tariff
The payment reflects sums already owed, the value and prospects of the claims being waived, and the litigation costs each side would otherwise face.
£30,000 tax threshold
Under section 403 ITEPA 2003, the first £30,000 of genuine termination compensation, including statutory redundancy pay, can be paid without income tax.
Notice pay fully taxed
Since 6 April 2018, post-employment notice pay is taxed as earnings in full, whatever the agreement calls it and whether or not there is a PILON clause.
Current compensation caps
Since April 2026 the compensatory award is capped at the lower of a year's pay or £123,543, and that cap is removed from 1 January 2027.
Ten days to consider
The Acas Code recommends, as a general rule, a minimum of 10 calendar days to consider the written terms and take independent advice.
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Settlement agreement how much: the short answer
There is no statutory tariff. In a settlement agreement how much is paid depends on three things: what the employee is already owed (salary, notice, holiday and bonus), the value and strength of the claims being given up, and each side's appetite for the cost, time and risk of a tribunal. The tax treatment then decides what the employee actually receives.
A well-structured package usually separates contractual sums, which are taxed as earnings, from a compensation payment for loss of employment, of which the first £30,000 can be paid free of income tax if the conditions are met. Post-employment notice pay is always taxed in full, however the payment is described. Employers commonly also contribute to the employee's legal fees, because independent legal advice is a legal requirement for the agreement to be binding.
As of October 2026, the valuation is shifting. From 1 January 2027, the cap on unfair dismissal compensation is removed and the qualifying period falls to six months, so for many employees the claims being settled will be worth more.
The legal framework behind the number
A settlement agreement is a contract under which an employee gives up specified claims in exchange for agreed terms. Statutory employment rights cannot be waived by an ordinary contract. Under section 203 of the Employment Rights Act 1996, and equivalent provisions in the Equality Act 2010, a waiver is valid only if the agreement is in writing, relates to particular complaints, and the employee has received advice from a relevant independent adviser who is identified in the agreement and insured.
The alternative is an Acas-conciliated settlement recorded on a COT3, which does not require independent legal advice. Either way, the payment is the price of certainty: the employer buys a release of the claims, and the employee trades the uncertain value of litigation for a guaranteed sum.
The Acas Code of Practice on settlement agreements recommends that, as a general rule, the employee is given a minimum of 10 calendar days to consider the formal written terms and take advice, unless the parties agree otherwise. Pre-termination negotiations are generally inadmissible in an ordinary unfair dismissal claim under section 111A of the 1996 Act, but that protection does not extend to discrimination or whistleblowing claims, or to improper behaviour.
The building blocks of a settlement package
Most packages are built from the same components. Separating them properly is the foundation of answering, in any settlement agreement how much will be paid and how much will be taxed.
| Component | What it is | Usual tax treatment |
|---|---|---|
| Salary and benefits to termination | Pay for work done up to the termination date | Earnings: income tax and National Insurance |
| Accrued holiday pay | Untaken statutory and contractual holiday | Earnings: income tax and National Insurance |
| Notice pay or pay in lieu of notice | Pay for the notice period, worked or not | Post-employment notice pay is taxed in full as earnings |
| Bonus or commission | Contractual or earned variable pay | Earnings: income tax and National Insurance |
| Statutory redundancy pay | Formula-based payment for qualifying redundancies | Counts towards the £30,000 threshold |
| Compensation for loss of employment | The ex gratia sum for giving up claims | First £30,000 (with redundancy pay) free of income tax; excess taxed |
| Payment for restrictive covenants | Consideration for new or reaffirmed restrictions | Taxed in full as earnings |
| Contribution to legal fees | Payment of the employee's advice costs | Tax-free if paid directly to the employee's solicitor for termination advice |
Tax: the £30,000 threshold and notice pay
Under section 403 of the Income Tax (Earnings and Pensions) Act 2003, payments taxable as compensation for the termination of employment benefit from a £30,000 threshold, below which no income tax is payable. The threshold is shared: payments from the same employer and associated employers are aggregated, and only one £30,000 applies. Statutory redundancy pay uses part of the threshold.
Since 6 April 2018, rules on post-employment notice pay require the basic pay the employee would have earned during any unworked notice period to be taxed in full as earnings, even if the contract has no pay in lieu of notice clause and the payment is described as compensation. The calculation uses basic pay only, so bonuses and benefits are excluded from it.
Employee National Insurance contributions are generally not due on a genuine termination payment, but employer National Insurance contributions are payable on the amount above £30,000. Each element of the package should be identified in the agreement; HMRC guidance warns that where an agreement simply pays a single sum "in settlement of all claims", the payment may need to be apportioned between its elements.
Relabelling contractual pay as "compensation" does not make it tax-free. Employers usually seek an indemnity from the employee for any further tax, but the better protection for both sides is to get the categorisation right in the first place.
How to value the claims being settled
The compensation element reflects the value of the claims the employee is giving up, discounted for risk. The key question in any settlement agreement how much the claims are realistically worth comes down to four factors: the claims available, their likely value if successful, the prospects of success and the cost of getting there.
Unfair dismissal
For an employee with qualifying service, unfair dismissal gives a basic award by formula and a compensatory award for financial loss. Since 6 April 2026, a week's pay for the basic award is capped at £751, and the compensatory award is capped at the lower of a year's gross pay and £123,543, under the Employment Rights (Increase of Limits) Order 2026. For dismissals effective on or after 1 January 2027, the compensatory cap disappears. Our guide to unfair dismissal explains the calculation.
Discrimination and whistleblowing
Discrimination and whistleblowing claims are not subject to a compensation cap and need no qualifying service. Discrimination awards can include injury to feelings in addition to financial loss. Where there is credible evidence of discrimination or a protected disclosure, the negotiation changes significantly, which is why employers should review the history carefully; see our page on discrimination and harassment.
Contractual claims
Disputes about bonuses, commission, share awards and notice can be worth more than the statutory claims, particularly for senior employees. Leaver provisions in share plans and deferred bonus schemes often decide whether awards lapse, and they are a frequent subject of negotiation.
Negotiation leverage: what moves the number
For a senior hire, a whistleblower or an employee leaving under a restructuring, the answer to settlement agreement how much is ultimately a negotiation. These are the levers that most often move it:
- Strength of the claims. Documentary evidence of an unfair process, discriminatory comments or a protected disclosure increases the value of the release.
- Cost and time of litigation. Tribunal costs are usually irrecoverable even for the winner, so the employer's defence costs are a real part of the calculation.
- Timing. With the unfair dismissal cap removed from 1 January 2027, and tribunal time limits extended to six months from 1 October 2026, the timing of the exit affects both value and risk.
- Non-financial terms. Agreed references, announcements, garden leave, retention of benefits, outplacement and treatment of share awards can be worth as much as cash.
- Confidentiality and reputation. The employer's interest in confidentiality and non-disparagement has value, but it is subject to the statutory limits on preventing protected disclosures, and future restrictions under the Employment Rights Act 2025.
- Restrictive covenants. Releasing or narrowing post-termination restrictions can be valuable to an employee who wants to join a competitor; see our guide to non-compete clauses.
The best settlement is not the largest headline figure. It is the package that delivers the most after tax, with terms both sides can live with.
Settlement agreement how much: the employer and employee views
For employers setting a budget
Employers usually set a settlement budget by estimating the realistic tribunal outcome, discounting it for the prospects of a successful defence, and adding the legal and management cost of defending a claim to a final hearing. Management time, disruption, the risk of publicity and the effect on other staff are real costs even if they are hard to quantify. Where a restructuring affects several employees, consistency matters: an unusually generous package for one person can set expectations for others. Our guide to the redundancy process explains how enhanced redundancy terms interact with individual settlements.
For employers, the question in a settlement agreement how much to offer should also reflect the 2027 reforms. Under the Employment Rights Act 2025, an exit agreed now settles claims on today's capped risk profile, while an exit effective after 1 January 2027 must be priced against uncapped exposure for employees with six months' service.
For employees weighing an offer
Employees should start by checking that the offer pays everything already owed, because those sums are not a concession. The real negotiation is about the compensation element and the non-financial terms. An employee should compare the net value of the offer after tax with a realistic estimate of what a tribunal might award, less legal costs that are unlikely to be recovered, and weigh the time, stress and uncertainty of litigation against the certainty of an agreed exit.
For an employee, the answer to settlement agreement how much to accept is personal as well as financial. A clean reference, a quick exit and the ability to start a new role without restrictions may be worth more than a marginally higher payment. Independent advice is required for the agreement to be binding, and it is also the best way to test whether an offer is reasonable.
An illustrative scenario
This scenario is illustrative only; the parties are generic.
A senior manager with six years' service was told her role was at risk in a restructuring. She had raised a written grievance about comments made by her line manager about her age six months earlier. The employer proposed a settlement agreement offering her contractual notice and a modest ex gratia payment.
Her solicitors identified a potential unfair dismissal claim (the selection pool was questionable), a potential age discrimination claim linked to the grievance, and a dispute about a deferred bonus. The employer's advisers recognised that the discrimination risk was uncapped and that defending a tribunal claim would cost more than the gap between the parties. The final package separated notice pay (taxed in full), holiday pay and the bonus (taxed as earnings), and a compensation payment, part of which fell within the £30,000 threshold. It also included an agreed reference, an internal announcement and a contribution to her legal fees paid directly to her solicitors.
Risks and common mistakes
Treating the whole payment as tax-free
Only genuine compensation for loss of employment benefits from the £30,000 threshold. Salary, holiday pay, bonuses, payments for restrictive covenants and post-employment notice pay are taxable in full. Getting this wrong can lead to underpaid tax and penalties, and disputes over indemnities. Itemise every element.
Signing before advice or under pressure
A settlement agreement is not binding over statutory claims unless the employee has received independent legal advice from a qualified, insured adviser. Employers who impose unreasonable deadlines or apply undue pressure risk losing the protection for pre-termination negotiations. The Acas Code suggests at least 10 calendar days as a general rule.
Overlooking share awards and pension
Unvested shares, options and deferred bonuses are often worth more than the cash payment, and their treatment depends on scheme rules. Pension contributions may also be part of a tax-efficient package. These should be addressed explicitly in the agreement, not left to the general release.
Using confidentiality to cover protected disclosures
A confidentiality clause cannot prevent a worker from making a protected disclosure, and the Employment Rights Act 2025 contains further restrictions on clauses about harassment and discrimination that were awaiting regulations as of October 2026. Agreements should include clear carve-outs for disclosures to regulators, the police and legal advisers.
Cross-border exits
For internationally mobile employees, the tax position depends on residence and where duties were performed. HMRC guidance notes that relief for foreign service is only available in limited circumstances, and post-employment notice pay follows the general residence rules for earnings. Where an employee is moving to or from Bangladesh, the Gulf or elsewhere, the agreement should also deal with local claims, immigration status and the governing law of any share plans. Our senior executive employment team coordinates this advice with colleagues in other jurisdictions.
Where the employer is part of an overseas group, the agreement should also identify which group companies are released and which are giving the release, so that claims against a parent or affiliate are not left open. If the employee holds awards under a plan operated by a foreign parent, the plan administrator may need to confirm the treatment in writing before the agreement is signed.
What to do next
- List what is already owed: salary, notice, holiday, bonus and benefits.
- Identify every potential claim and estimate its value and prospects.
- Check whether the effective date of termination falls before or after 1 January 2027.
- Structure the package so each element is correctly categorised for tax.
- Agree non-financial terms: reference, announcement, covenants and share awards.
- Ensure independent legal advice and allow reasonable time to consider the terms.
In every settlement agreement how much is paid, and how it is structured, should follow from a clear analysis rather than a rule of thumb. TRW & Co's London office is authorised and regulated by the Solicitors Regulation Authority. Our settlement agreements team advises employers and senior employees on valuation, negotiation and drafting. To discuss an offer, contact us at info@trw.co.
Frequently asked questions
01How much is a typical settlement agreement payout?
There is no typical figure or statutory formula. The amount reflects what the employee is already contractually owed, such as notice and holiday pay, plus a compensation payment for giving up claims. That compensation depends on the strength and value of the potential claims, the employer's litigation costs and the non-financial terms agreed. Employees with strong discrimination or whistleblowing claims, or significant share awards, usually achieve higher settlements than those with weaker claims.
02Is a settlement agreement payment tax-free?
Partly, in many cases. Genuine compensation for the loss of employment can be paid free of income tax up to £30,000 under section 403 of the Income Tax (Earnings and Pensions) Act 2003. Salary, holiday pay, bonuses, payments for restrictive covenants and post-employment notice pay are taxed in full. Employer National Insurance contributions are payable on termination payments above £30,000. The agreement should itemise each element.
03Is notice pay taxable in a settlement agreement?
Yes. Since 6 April 2018, post-employment notice pay, which is the basic pay the employee would have earned during any unworked notice period, is taxed as earnings in full. This applies whether or not the contract contains a pay in lieu of notice clause and whatever label the agreement uses. Only the balance of genuine compensation above that amount can benefit from the £30,000 threshold.
04Does my employer have to pay for my legal advice?
There is no legal obligation, but employers commonly contribute because independent legal advice is required for the agreement to be binding over statutory claims. A contribution paid directly to the employee's solicitor for advice on the termination is generally tax-free. The amount is negotiable and is usually stated in the agreement, and employees should check whether it covers advice on share plans or tax as well.
05How long do I have to consider a settlement agreement?
The Acas Code of Practice on settlement agreements recommends that, as a general rule, employees are given a minimum of 10 calendar days to consider the formal written terms and take independent advice, unless the parties agree otherwise. Tribunals take the Code into account when deciding whether conduct during negotiations was improper. Employees should not sign until they have received advice from their independent adviser.
06Can I negotiate a higher settlement offer?
Usually, yes. Offers are often a starting point. Leverage comes from documented evidence of unfair treatment, discrimination or protected disclosures, unpaid contractual entitlements, the employer's costs of defending a claim and its interest in confidentiality and a clean exit. Non-financial terms such as references, announcements, share award treatment and covenant releases can also be negotiated. A solicitor can value the claims and present a reasoned counter-proposal.
Sources and official materials
- Employment Rights Act 1996, section 203 — Conditions for a valid settlement agreement
- Income Tax (Earnings and Pensions) Act 2003, section 403 — £30,000 termination payment threshold
- HMRC Employment Income Manual EIM13874 — Post-employment notice pay from April 2018
- Acas Code of Practice on settlement agreements — Time to consider and good practice
- Employment Rights (Increase of Limits) Order 2026 — Current compensation limits
- Employment Rights Act 2025 (Commencement No. 4) Regulations 2026 — Removal of the compensation cap from 1 January 2027
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.