Settlement Agreement Calculator UK 2025 — Is Your Offer Fair?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract in which you waive your right to bring Employment Tribunal claims in exchange for a financial payment. They are very common when leaving employment. Use this calculator to compare your offer against what you could realistically recover at tribunal, understand the tax treatment, and get tips on negotiating a better deal.
Note on tax: PILON is always taxable. Statutory redundancy pay and ex gratia payments up to £30,000 combined are tax-free. Injury to feelings and personal injury payments within a settlement are separately tax-free. Settlement agreement fees paid directly to your solicitor by your employer are also tax-free. Always confirm tax treatment with an accountant.
What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between you and your employer, under which you agree to waive your right to bring specified Employment Tribunal claims in exchange for a payment (and sometimes other benefits). For a settlement agreement to be legally valid, you must receive independent legal advice from a qualified solicitor, barrister, trade union official, or certified adviser — who must sign the agreement to certify you received advice.
Settlement agreements are used in a wide range of situations: redundancies (often with enhanced packages), dismissals (to avoid tribunal claims), disciplinary situations, and mutual separations where both parties want a clean break. They are increasingly common — ACAS estimates that more employment disputes are resolved by settlement agreement than by tribunal judgment.
The £30,000 Tax-Free Threshold
The tax treatment of settlement payments is complex. The key rule is that the first £30,000 of a genuine termination payment (the "ex gratia" element — not notice pay, not statutory redundancy pay if separately excluded) is tax-free and free of National Insurance. Amounts above £30,000 are subject to income tax at your marginal rate but are exempt from employee NI.
However, notice pay (PILON — payment in lieu of notice) is always taxable as earnings, as is any payment for holiday pay owed. Injury to feelings payments included in a settlement are separately tax-free if they relate to discrimination. Your employer must correctly apportion the settlement to maximise your tax-free position.
Negotiating Your Settlement Agreement
Settlement agreements are almost always negotiable — do not assume the first offer is final. Key negotiating points include: the cash amount (ex gratia payment); enhanced notice pay; retention of company car, phone, or laptop; reference wording (very important); non-derogatory clause; pension contributions; share vesting; garden leave; and the employer's contribution to your legal fees (typically £350–£1,000). Your negotiating strength depends primarily on the strength of any underlying claims and how much the employer wants to avoid tribunal proceedings.
Your Solicitor's Role
Your employer will almost always pay a contribution towards your legal fees for signing a settlement agreement — typically £350–£750 for a straightforward case. This covers the solicitor's review and signing. However, if you have significant claims or want to negotiate, you may need to pay additional fees yourself. Many employment solicitors offer free initial consultations, and some take cases on a no-win no-fee basis where there are strong underlying claims. Always use a specialist employment law solicitor — not just any conveyancing solicitor.
Frequently Asked Questions
Yes, absolutely. A settlement agreement is a voluntary contract. You cannot be forced to sign one. If you refuse, the employer cannot lawfully dismiss you simply for refusing — though they may proceed with whatever process (redundancy, disciplinary) they were conducting alongside the settlement offer. Refusing a settlement means the employment relationship continues normally, or the employer must follow proper dismissal procedures.
Under section 111A of the Employment Rights Act 1996, an employer can have a "protected conversation" with an employee to discuss a settlement without that conversation being used as evidence of unfair dismissal in tribunal. This gives employers a way to approach settlement discussions without the risk of a without-prejudice conversation being used against them. However, it does not protect against discrimination, whistleblowing, or automatic unfair dismissal claims — and it also does not prevent you from walking out and bringing those claims.
Yes, though the settlement payment may temporarily reduce your Universal Credit because it is treated as capital for UC purposes until it falls below £16,000. New Style JSA is contribution-based — you can claim if you have sufficient NI contributions regardless of savings. If you were made redundant rather than voluntarily agreed to leave, there is no JSA waiting period.