🇬🇧 UK · Employment Law · Updated 2026-06-27
Is a settlement agreement taxable in the UK?
The first £30,000 of total termination payment is tax-free. Amounts above £30,000 are subject to income tax. Pay in lieu of notice (PILON) is always fully taxable, regardless of the threshold.
Under ITEPA 2003 s.403, the first £30,000 of a total termination payment — including statutory redundancy pay, ex gratia, and enhanced notice pay — is exempt from income tax and employee National Insurance. Amounts above £30,000 are taxed as employment income at your marginal rate. Your employer typically deducts tax before paying the settlement sum.
Pay in lieu of notice (PILON) is treated differently. Since April 2018, all PILON payments are fully taxable as earnings — they no longer benefit from the £30,000 exemption regardless of whether the contract contains a PILON clause. If your settlement includes PILON, expect to receive it net of income tax and NI.
Injury to feelings awards (in discrimination claims) are not subject to income tax. Legal fees paid directly to your solicitor by the employer are generally not taxable in your hands, provided the payment is made for legal advice on the termination of employment.
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