What a settlement agreement actually is
It’s a written, legally binding contract that settles an employment matter. In the usual case, your employment ends and you receive an agreed payment; in return you agree not to bring specified claims (like unfair dismissal or discrimination) against your employer at an employment tribunal.
It can also include an agreed reference, a confidentiality clause, and terms about your leaving date. Anyone can suggest one — you or your employer — and it doesn’t always mean the end of your job (it can settle a one-off dispute, like a bonus, without you leaving).
It only counts if you agreeA settlement agreement is voluntary. It takes effect only when both sides sign — and only after you’ve had independent advice. Nothing is settled until then.
“Without prejudice” and protected talks
Discussions about a settlement are usually held on a “without prejudice” or “protected” basis. That means, in most cases, what’s said in those talks can’t be used as evidence if you later bring an ordinary unfair dismissal claim — so you can negotiate openly without it counting against you.
There are important limits: this protection doesn’t cover things like discrimination, or where there’s been “improper behaviour” (for example undue pressure to accept). If the situation involves discrimination or bullying, get advice on how the protection applies to you.
Don’t feel rushedYou’re entitled to a reasonable time to consider an offer — ACAS suggests a minimum of around 10 calendar days. Take it. A same-day “sign now or the offer’s gone” is a red flag, not a genuine negotiation.
Why you must get independent advice
By law, a settlement agreement is not legally binding unless you’ve had advice on its terms and effect from a “relevant independent adviser” — usually a solicitor, or a certified trade union official or advice-centre worker — who is insured and named in the agreement.
Because the employer needs your signed, advised agreement for it to work, they almost always pay a contribution towards your legal fee (often a few hundred pounds). So getting proper advice usually costs you little or nothing — and it’s your chance to make sure the deal is fair, spot anything you’re owed, and negotiate.
Advice isn’t just a rubber stampA good adviser checks the numbers, the reference, the restrictive covenants and which claims you’re giving up — and can push for more where the offer is low. Never treat it as a formality; it’s the one moment you have real leverage.
How the payment is taxed
The payment is usually a mix of parts, taxed differently. The genuine compensation (the “ex gratia” sum for losing your job) is normally tax-free up to £30,000. But money that is really contractual pay is taxed as normal pay — whatever the agreement calls it:
| Part of the payment | Tax treatment |
|---|
| Genuine compensation for loss of job | Tax-free up to £30,000; taxable above |
| Notice pay / pay in lieu of notice (PILON) | Taxed + National Insurance |
| Unpaid wages & accrued holiday | Taxed + National Insurance |
| Bonus / commission owed | Taxed + National Insurance |
Always check the breakdown: how much is tax-free compensation, and how much is taxable pay. If your code looks wrong afterwards, see our tax code guide and whether you’re owed a tax refund.
What to check before you sign
- The total — and the split. How much is tax-free compensation vs taxable pay (notice, holiday, wages, bonus)?
- Everything you’re owed. Is your notice, accrued holiday and any bonus/commission included on top of the compensation, not swallowed by it?
- The reference. Is the agreed wording attached? A neutral, factual reference is worth negotiating for.
- Restrictive covenants. Do any clauses limit where or for whom you can work next? Are they reasonable?
- Confidentiality & non-derogatory clauses. Understand what you can and can’t say — and that they should apply to both sides.
- Which claims you give up. The agreement should list them specifically — you keep the right to claim accrued pension and to enforce the agreement itself.
- The leaving date and how & when the money is paid.
Do this now
Don’t sign anything yet. You’re entitled to time to consider it and to independent legal advice your employer normally pays for. Line up an adviser (a solicitor, or your trade union) before you respond — find one via our find a professional tool, or your union.
While you decide, sanity-check your position: if this is really a redundancy, see statutory redundancy pay; if you think the dismissal is unfair, read unfair dismissal — both affect what a fair settlement looks like.
Related guides — leaving a job
Source verification
Primary sources: ACAS — Using settlement agreements (
acas.org.uk/settlement-agreements, last updated 25 March 2026): the definition (written, legally binding, voluntary, negotiated; formerly “compromise agreements”), what they can include, the legal-validity conditions (in writing, related to a specific claim, advice from a named insured relevant independent adviser), and that anyone can suggest one. Tax treatment — GOV.UK / HMRC: statutory redundancy and genuine termination compensation is tax-free up to £30,000, with contractual pay (notice/PILON, wages, holiday, bonus) taxed and NI-deducted as normal (
gov.uk/redundancy-your-rights/tax-and-national-insurance and the termination-payments guidance). Last verified 2 July 2026. Confidence: High on the £30,000 rule and the independent-advice requirement (long-standing statute). The ~10-day “reasonable time” is ACAS good-practice guidance, not a hard legal deadline. Scope: Great Britain (Northern Ireland has equivalent rules via the LRA). Not legal advice — the whole point of a settlement agreement is that you take your own independent advice before signing.
Settlement agreements — common questions
What is a settlement agreement?
A written, legally binding contract that ends an employment dispute — usually ending your job for an agreed payment, in return for you not bringing specified tribunal claims. It’s voluntary and only valid once you’ve had independent legal advice from a named, insured adviser.
Do I have to accept one?
No — it’s voluntary. You can accept, reject or negotiate. Saying no leaves your job and rights unchanged (though a fair process like redundancy could still follow). Take time to think and never sign under pressure.
Is the money tax-free?
The genuine compensation part is usually tax-free up to £30,000. Above that it’s taxable, and contractual pay — notice, wages, holiday, bonus — is taxed and NI-deducted as normal, whatever it’s labelled. Check the breakdown.
Do I need a solicitor?
Yes — legally it isn’t binding without advice from a relevant independent adviser (usually a solicitor, or a union official), who must be insured and named. Employers normally pay a contribution to the fee, so it usually costs you little or nothing.
What should I check before signing?
The total and the tax split; that your notice, holiday and bonus are included on top; the reference wording; any restrictive covenants; the confidentiality clause; which claims you’re giving up; and the leaving date and payment timing. Get advice first.