Offered a settlement agreement? What to check before you sign

General guidance for UK employees. Not legal advice.

You have been handed a settlement agreement, or you have been told one is coming. You have not signed it. You have not replied with a number. That is exactly where you want to be. This page is settlement agreement advice for UK employees in plain terms. It sets out what to check before signing a settlement agreement, how much a settlement agreement should be, how settlement agreements are taxed, and how to negotiate a settlement agreement without asking your employer to spend a penny more.

What a settlement agreement really is

A settlement agreement is a legally binding agreement, usually involving a payment, by which you agree not to bring claims against your employer. In return you receive money and, often, other terms such as a reference. It is the current UK term. Compromise agreement and severance are not the correct words for it.

One point matters above all others. A settlement agreement is only binding once you have taken independent legal advice on its terms from a qualified adviser. That adviser must be named in the agreement and carry insurance. This is a legal requirement, not a formality. Until you have taken that advice, the agreement is not sealed, and you are under no obligation to sign anything. The employer knows this, which is why they almost always contribute to the cost of the advice.

Why the first offer is rarely the last

An employer who offers you a settlement has already decided they want you to leave without a fight. That decision is the most important fact in the room. Think about what the alternative costs them. A contested exit means tribunal time, legal fees that often run well beyond the sums in a settlement, management hours, and disclosure of internal documents they would rather keep private. The offer is the price they have put on avoiding all of that.

Settlement offers usually arrive in what is called a protected conversation, under section 111A, or on a without prejudice basis. In plain terms, the conversation is meant to be off the record. The fact that you have a written offer tells you something useful. The employer has weighed the cost of not settling and decided settling is cheaper. Employers do not usually open at their ceiling. They open low and expect a response. An offer that arrives with a deadline is still an opening offer. This does not mean every offer can be improved. It means you should never assume the first number is the only number until you have done the analysis.

The four numbers behind any offer

A settlement offer is almost never worth what the headline says. Tax comes out of part of it before it reaches you, and the part that gets taxed is often larger than people expect. On a typical offer the gap between the headline and what lands in your bank account can be 40% or more. To see the real value, break any offer into four numbers.

One, the headline. The number your employer leads with. It means the least, because it tells you nothing about what reaches your bank account. Two, the notice element, known as Post-Employment Notice Pay, or PENP. This is the part of the offer that is for notice you did not work. It is taxed in full as earnings, and it does not get the tax-free treatment. It is the number most people have never heard of, and usually the one that does the most damage to a headline figure. Three, the £30,000 cap. The first £30,000 of genuine ex-gratia compensation is normally free of income tax. This applies only to the genuine compensation, not to pay you were owed and not to PENP. Four, the net cash in hand. What actually reaches your account once the tax on the taxed parts has come out.

The label your employer puts on the money does not decide the tax. The substance does. And because the figures depend on facts only an adviser checking your details can confirm, have your own numbers confirmed by a qualified tax adviser before you sign anything or rely on any figure.

What you can actually negotiate

Once you can see the real number, you can improve it. There is more on the table than cash. The levers below are worth raising, in rough priority order.

• An employer pension contribution. Often the most valuable lever for someone in their late forties or fifties. A payment into your pension is generally free of income tax and National Insurance, within your annual allowance, so it is worth more than the same money paid as taxable cash.
• Outplacement. Career coaching and job-search support from a recognised provider is normally tax free. Asking for a larger outplacement budget is one of the most tax-efficient moves available.
• Legal fees paid direct to your solicitor. When the employer's contribution is paid straight to your adviser under a clause, it is not normally taxable to you. Make sure the clause reads paid direct to the adviser, not reimbursed to the employee.
• An agreed written reference. Negotiate the exact wording in advance and have it attached to the agreement as a schedule, with the employer committing not to depart from it.
• Restrictive covenants. The agreement may restate or tighten the limits on where you can work and who you can approach. Read these closely and negotiate them down, because an over-broad covenant can cost you your next role.
• Mutual non-disparagement. Confidentiality and non-derogatory clauses usually bind only you. Ask for them to run both ways, so the employer and its managers are equally bound.

How to counter without asking for more money

The strongest counter often asks for the same cash cost to the employer, then rebuilds it so more of the value survives tax. Take the pounds that were going to be taxed heavily, the cash spilling above the £30,000 cap, and redirect them into the levers that keep their value. Pension first, then outplacement, then the protective terms.

Say an offer puts £5,000 above the cap, where it would be taxed at your marginal rate. Redirecting that £5,000 into a pension contribution and an outplacement budget can leave you with close to the full £5,000 of value rather than the roughly £2,900 that would survive as taxable cash. The employer's total cash cost does not change by a penny. The value you receive goes up. Where you do want genuinely more money on top, make the argument on what the employer's alternative would cost them, not on whether their figure is fair. The fairness argument invites a debate you cannot win. The cost-of-alternative argument points quietly at the tribunal time, legal spend, disclosure and uncertainty on their side, and lets them reach the conclusion themselves.

Do you need a solicitor, and who pays

Yes, you need a solicitor. A settlement agreement is not legally binding until you have taken independent legal advice on its terms, so this is not optional. The good news is that the employer almost always contributes to the cost, and often pays your adviser directly. A settlement touches two specialisms, employment law and tax, and you may need both. For a straightforward offer the solicitor may be enough. Where there is a sizeable notice element, a pension contribution close to your annual allowance, or a discrimination angle, a qualified tax adviser is worth the fee, because a mistake on the figures costs more than the advice.

You keep the cost down by arriving prepared. If you walk into the meeting already knowing your four numbers and what you want to change, the hour is spent getting the agreement right rather than on a basic explanation of tax. That is what the Settlement Counter Offer Kit is built to do. It gets you to the advice meeting ready, so the advice is faster and cheaper.

The law is changing, and it can strengthen your hand

The rules that sit behind an employer's alternative are moving. As things stand, an employee normally needs two years of service to bring an ordinary unfair dismissal claim, and the compensatory award is capped. From 1 January 2027, under the Employment Rights Act 2025, two changes are expected. The qualifying period for unfair dismissal is set to drop from two years to six months. And the cap on the compensatory award for unfair dismissal is expected to be removed.

For some people this raises the cost of the employer's alternative, because a claim becomes available sooner and the potential award is no longer capped. That can strengthen your position in a negotiation running close to or beyond that date. Whether it applies to you depends on your service, your situation and the timing. These are commencement targets and can move, so treat the dates as targets, not fixed points, and check the current position or take advice before you rely on them.