Settlement Agreement (Employment) UK: Complete Guide (2026)

A settlement agreement is the legally binding contract that ends an employment dispute without the claim ever reaching an Employment Tribunal. It used to be called a compromise agreement; the name changed in 2013, but the law underneath did not. If you sign one, you give up the right to bring almost any claim arising from your employment — in exchange for a sum of money, usually paid free of tax up to £30,000. The rules are strict: get one element wrong and the agreement is worthless.

When Do You Need a Settlement Agreement?

Redundancy with enhanced package — employer is obliged to pay statutory redundancy/notice but wants full waiver for the enhancement. Performance/disciplinary exit — avoid formal process that could become unfair dismissal. Existing dispute — grievance, protected disclosure, discrimination, ACAS EC. Mutually agreed exit — relationship run its course.

Statutory Requirements: Section 203 ERA 1996

Section 203 ERA 1996: employee cannot contract out of statutory employment rights. s.203(3) creates narrow exception with six conditions:

1. In writing.
2. Particular complaint or proceedings. Specific schedule of claims — unfair dismissal, discrimination, unlawful deduction, holiday pay, whistleblowing, and so on.
3. Employee receives advice from relevant independent adviser — qualified solicitor, certified union officer, or certified advice centre worker.
4. Adviser named in the agreement.
5. Adviser holds professional indemnity insurance.
6. Agreement states statutory conditions have been satisfied.

Miss any — waiver fails. Employee keeps the money AND can bring the Tribunal claim. Equivalent: s.147 Equality Act 2010 for discrimination.

Tax Treatment

The £30,000 Cap (s.401 ITEPA 2003)

First £30,000 of genuine ex-gratia termination payment tax-free. “Ex-gratia” means not contractually owed — compensation for loss of employment, not substitute for salary/notice/bonus/holiday pay earned.

Post-Employment Notice Pay (PENP)

Since 6 April 2018, notice-pay portion fully taxable whether or not there is a PILON clause (s.402D ITEPA 2003). Calculate what employee would have earned in basic pay during unworked notice — that amount cannot be sheltered.

PENP is the most common drafting trap. “£45,000, of which £30,000 is tax free” may be correct — or may mean £15,000 of PENP is buried inside.

Fully Taxable

• Contractual PILON or PENP calculation
• Accrued untaken holiday pay
• Earned unpaid bonus, commission, benefits
• Restrictive covenant payment (usually £1–£100, taxed in full)

Can Sit Within £30,000

• Compensation for loss of employment
• Enhanced redundancy over statutory (statutory is also tax-free but separate)
• Injury to feelings in discrimination where genuinely connected to the discrimination

What Should Be in the Agreement

1. Termination Date

Single precise date. Anchors notice, PENP, restrictive covenant clock.

2. Settlement Sum — Fully Itemised

Every pound allocated: salary to termination, notice/PENP, holiday pay, ex-gratia, injury-to-feelings, restrictive covenant consideration, legal fees contribution.

3. Waiver of Claims

Listed by specific claim — unfair dismissal, wrongful dismissal, redundancy, unlawful deduction, breach of contract, discrimination on each protected characteristic, harassment, victimisation, whistleblowing, equal pay, working time, part-time worker, fixed-term, TUPE, and any ACAS-notified claim.

4. Notice Period Treatment

Worked, garden leave, or PILON. Garden leave should specify continuing duties.

5. Reference

Most valuable non-cash term. Annex agreed reference wording; employer must provide in that form on reasonable requests.

6. Confidentiality

Mutual, time-limited, with SRA carve-outs (see below).

7. Non-Disparagement

Reciprocal only. Any clause binding employee but not employer unbalanced.

8. Tax Indemnity

Standard. Limited to tax itself, excluding penalties/interest from employer’s error.

9. Return of Property, Resignation Letter, Restrictive Covenants, Statutory Statement

Standard closing terms.

The SRA Warning Notice on Confidentiality

Confidentiality must carve out:

• Protected disclosures (whistleblowing) under Part IVA ERA 1996
• Reporting a criminal offence
• Cooperating with criminal investigation
• Reporting misconduct to regulators (SRA, FCA, ICO, GMC, NMC)
• Reporting sexual harassment or misconduct
• Disclosure to family, medical, therapy, legal, tax advisers
• Disclosure required by law, court order, or regulator

Missing carve-outs = drafting failure, not negotiating position. Ask for them.

Protected Conversations — s.111A ERA 1996

Employer may raise settlement proposal “off the record” in pre-termination negotiation. Not usable in ordinary unfair dismissal claim. Does not protect: discrimination claims, automatic unfair dismissal, breach of contract, or improper employer behaviour. ACAS Code of Practice on Settlement Agreements sets conduct standard.

Negotiation Tactics

Standard redundancy with clean service: enhancement typically 3–6 months’ gross salary. Real claim backing (discrimination, whistleblowing, unfair dismissal): often double digits of months.

Opening Moves

• Never accept first offer.
• Ask for breakdown — disguised PENP shrinks headline.
• Price non-cash terms. Agreed reference can be worth £10,000 in future earnings.
• Quantify strongest claim — uncapped claims move numbers.
• Legal fees contribution: £500–£1,500 plus VAT standard.

What to Reject

• Confidentiality without SRA carve-outs
• Non-reciprocal non-disparagement
• Covenants wider than contract allowed
• Tax indemnities extending to penalties/interest from employer’s error
• Warranties that you have not raised or will never raise any complaint

Key Deadlines

• ACAS Code: minimum 10 days to consider
• ACAS EC before ET1 filing
• Tribunal limitation: 3 months less one day
• Payment: usually 14–28 days after signing

Common Mistakes

• Signing without itemised breakdown
• Treating whole “£30,000 package” as tax-free
• Reference in body rather than annexed
• Not querying copied-over restrictive covenants
• Confidentiality without SRA carve-outs
• Clawback triggered by “any breach” rather than “material breach”
• Signing without independent legal advice
• Not keeping copies of every draft

The Rules That Apply

• ERA 1996 s.203 — conditions for valid waiver
• ERA 1996 s.111A — protected pre-termination conversations
• Equality Act 2010 s.147 — equivalent for discrimination
• ITEPA 2003 s.401 — £30,000 cap
• ITEPA 2003 s.402D — PENP
• ACAS Code of Practice on Settlement Agreements
• SRA Warning Notice on NDAs
• PIDA 1998 / Part IVA ERA 1996 — whistleblowing

How Chris Can Help

Chris drafts documents to your instructions. Chris does not give legal advice — the statute requires that from a qualified relevant independent adviser before signing. What Chris does is sharpen everything that happens before you reach that adviser’s desk.

Upload the draft and Chris produces clause-by-clause review: what is standard, missing, weighted against you, how SRA carve-outs should read, how PENP should be broken out, what the reference should look like, where covenants overreach. Chris drafts counter-proposal, HR email, letter instructing adviser, and — if talks break down — ET1 first draft after ACAS EC.

Litigator £30 covers one document. Running the whole negotiation (especially with constructive dismissal or discrimination backing): Pro Litigator at £88 — unlimited conversations, live research, multiple documents over 28 days. Six-figure stakes, multi-jurisdictional covenants: Hybrid with qualified reviewer sign-off.

7-day money-back guarantee. Not happy with the draft? We refund. We are miracle-makers, not miracle-workers — if merits are weak, no drafting saves a bad case.

Speak to Chris first — the earlier the drafting starts, the less you end up firefighting.

Subscribe: Email hello@elitigant.com with subject line “Application update” and say hello with your given name.

Frequently Asked Questions

Do I have to accept a settlement agreement?

No. It is an offer. Reject, negotiate, or let lapse and pursue via ACAS and Tribunal. Rejecting does not prejudice any subsequent claim.

Who pays for my legal adviser?

Employer pays contribution — typically £500–£1,500 plus VAT (2026). Usually covers statutory sign-off only. Advice on negotiation charged separately.

Is the £30,000 really tax-free?

First £30,000 of genuine ex-gratia payment tax-free (s.401 ITEPA 2003). PILON, PENP, holiday, earned bonus, covenant payments fully taxable and outside the cap. Always insist on breakdown.

Can I still report wrongdoing after signing?

Yes. Properly drafted carves out protected disclosures, reports to police/regulators, cooperation with investigations. Any clause trying to prevent these is unenforceable under the SRA Warning Notice.

What if the employer does not pay?

Enforceable as contractual debt in County Court via Form N1 or MCOL. Tribunal jurisdiction displaced by the contract.

Can I sign without advice?

Physically yes, but the waiver of statutory claims will not bind. s.203 requires advice from a relevant independent adviser.

Does signing affect my benefits?

Termination payments may affect means-tested benefits (especially Universal Credit — capital over £16,000 disqualifies). Take specific benefits advice.

How long do I have to decide?

ACAS Code: minimum 10 calendar days. Pressure below 10 days is itself a factor if later challenged.

Start Your Case

Ready to draft this yourself?

Chris drafts to the Litigant Standard™. You sign. You file. Pick the tier that fits your case.