Settlement agreement calculator

A settlement agreement (formerly called a compromise agreement) is a legally binding contract between an employer and employee that resolves an employment dispute or ends employment. In exchange for a payment, you waive your right to bring (or continue) Employment Tribunal claims. It must be in writing, and you must have received independent legal advice from a qualified adviser before signing — otherwise it is not legally valid.

A settlement agreement typically includes three elements: your statutory entitlements (redundancy pay and notice pay), an ex gratia payment to compensate for your claims, and a contribution to your legal fees (usually £500–£1,500). The ex gratia element is negotiated and reflects the strength of your potential claim, the cost of Tribunal proceedings, and your employer's risk appetite. Stronger claims (particularly discrimination claims, which are uncapped at Tribunal) attract larger ex gratia payments.

The first £30,000 of a total termination payment (including statutory redundancy pay, ex gratia, and enhanced notice pay) is tax-free. Amounts above £30,000 are subject to income tax at your marginal rate but not employee National Insurance. Pay in lieu of notice (PILON) is always fully taxable regardless of the £30,000 threshold. Your employer usually deducts tax on the taxable portion before paying you.

Yes — by law. A settlement agreement is only legally binding if you have received independent legal advice from a qualified adviser (usually a solicitor or trade union rep) who has a practising certificate and professional liability insurance. Your employer will normally contribute £500–£1,500 towards your legal fees for this advice. You are not obliged to sign the agreement, and taking advice does not commit you to accepting it.

Yes. The initial offer from your employer is rarely their final position. Common negotiating points include the ex gratia payment, the wording of the reference, garden leave or immediate departure, and the scope of the claims being waived. Settlement discussions take place under 'without prejudice' privilege — meaning they cannot be used against you at Tribunal if negotiations break down. Your solicitor can negotiate on your behalf.

If you do not sign, the employment relationship continues (if you are still employed) or you retain the right to bring Tribunal claims. Refusing to sign does not automatically mean you will lose your job — though if your employer has already started a dismissal process, that process will continue independently. 'Without prejudice' conversations cannot normally be used in evidence against you.