Settlement Agreement Calculator UK 2026/27

What goes into a settlement agreement payment

A settlement agreement (called a compromise agreement before 2013) is a contract in which the employee gives up the right to bring tribunal claims in return for an agreed payment. Most packages are built from the same four blocks, and the tax treatment depends on the block, not on the label in the agreement.

How the £30,000 tax-free rule works

Section 401 of the Income Tax (Earnings and Pensions) Act 2003 lets the first £30,000 of a payment for losing a job be paid free of income tax and National Insurance. Anything above £30,000 is taxed at the employee's marginal rate, with no employee NI, and since 6 April 2020 the employer pays Class 1A NI at 15% on the excess.

Since April 2018 the exemption can't be used to shelter notice pay. If any notice is not worked, HMRC's post-employment notice pay (PENP) formula carves out the basic pay the employee would have earned in that unworked notice and taxes it as earnings, even if the contract has no PILON clause and the agreement calls it compensation. The formula is (BP × D ÷ P) − T: basic pay in the last pay period (BP), days of unworked notice (D), days in that pay period (P), less any notice pay already taxed (T). For a monthly-paid employee with whole months of notice it simplifies to monthly basic pay × months of notice. Statutory redundancy pay is never treated as PENP.

Worked example (2026/27)

An employee on £45,000 aged 38 with 5 years' service is made redundant halfway through the tax year (£22,500 already earned). The agreement pays 3 months' notice in lieu, 5 days' untaken holiday, statutory redundancy and a £10,000 ex-gratia sum, and the employer contributes £500 to legal fees.

Above the limit: an employee on £80,000 aged 50 with 12 years' service gets 3 months' notice (£20,000, taxed), statutory redundancy of £12,392 (16.5 weeks at the £751 cap) and £25,000 ex-gratia. The redundancy and ex-gratia total £37,392, so £7,392 is taxable (income tax only) and the employer pays £1,109 Class 1A NI on it. Net to the employee is about £47,586.

Statutory redundancy pay in 2026/27

Employees with at least two years' continuous service get statutory redundancy pay. Count back complete years from the leaving date, up to 20 years, and pay a week's pay (capped at £751 from 6 April 2026) for each:

• half a week for each year in which the employee was under 22;
• one week for each year aged 22 to 40;
• one and a half weeks for each year aged 41 or over.

The maximum is 30 weeks × £751 = £22,530. The full year-by-year breakdown is on the redundancy pay calculator.

How much is a settlement agreement usually worth?

There is no official average, because settlement amounts are private. What a fair offer looks like comes down to three things:

1. What is owed anyway. Notice, holiday and any statutory redundancy are due whether or not anything is signed, so they are not really the price of the agreement.
2. The extra for waiving claims. This reflects the risk and cost of a tribunal claim. For unfair dismissal the compensatory award is based on actual lost earnings and is capped at the lower of 52 weeks' gross pay or £123,543 for dismissals before 1 January 2027, when the cap is removed. Discrimination awards are uncapped. The unfair dismissal calculator estimates that exposure.
3. Tax. Keeping the ex-gratia element within the £30,000 limit can be worth more to the employee than a larger, partly taxed sum.

Rules that make the agreement binding

• It must be in writing and relate to particular claims or proceedings.
• The employee must have received advice from a named relevant independent adviser (usually a solicitor) who holds professional indemnity insurance (Employment Rights Act 1996, s203).
• The Acas Code of Practice on settlement agreements suggests giving the employee at least 10 calendar days to consider the terms.
• Employers commonly contribute towards the employee's legal fees. Paid directly to the adviser for advice on the termination, this is tax-free (ITEPA 2003, s413A).

Employer checklist before making an offer

• Price the full cost: package, 15% employer NI on notice and holiday, 15% Class 1A on anything over £30,000, and legal fees.
• Run notice pay through payroll as earnings (PENP) and put the tax-free element through payroll too, so it appears on the employee's final payslip and P45 correctly.
• Check the notice period actually owed with the notice period calculator; statutory minimum notice is one week per complete year of service, up to 12 weeks.
• If the payment is made after the P45 has been issued, PAYE rules require it to be taxed using the 0T code on a non-cumulative basis, which can over-deduct; paying it in the final payroll run usually gives a cleaner result.