Start with what is owed
These are not negotiable and should be listed separately in the offer:
- salary and benefits to the termination date;
- notice, worked, on garden leave or paid in lieu, at the longer of contractual and statutory notice;
- accrued untaken holiday;
- statutory redundancy pay where applicable, and any contractual enhancement;
- earned bonus and commission.
Presenting these as the settlement sum invites a refusal and damages trust.
Value the risk
For each claim the employee could realistically bring, estimate:
- The likely award. For unfair dismissal, the basic award (up to £22,530) plus loss of earnings for the period they are likely to be out of work, currently capped at £123,543 or a year's pay. For discrimination or whistleblowing, uncapped loss plus injury to feelings of £1,300 to £62,900.
- The chance they would win. Be honest about procedural gaps.
- Your cost of defending. Legal fees for a contested tribunal claim run to tens of thousands of pounds and are rarely recovered even if you win. Add management time and witness disruption.
- The cost of the alternative process. Salary and management time for the months a fair process would take.
The compensation element should sit somewhere between your cost of the alternative and the risk-weighted value of the claim.
Typical ranges
| Situation | Compensation often offered, on top of entitlements |
|---|---|
| Low-risk, amicable exit | 1 to 3 months' gross pay |
| Process shortcuts or arguable unfair dismissal | 3 to 6 months' gross pay |
| Weak grounds for dismissal, senior or specialist role | 6 to 12 months' gross pay |
| Credible discrimination or whistleblowing allegations | Assessed individually, often above 12 months |
The full cost to you
| Item | Notes |
|---|---|
| Notice and holiday pay | Plus employer National Insurance and pension as normal |
| Termination payment up to £30,000 | No tax or National Insurance |
| Termination payment above £30,000 | Employer Class 1A National Insurance at 15% on the excess, reported through payroll |
| Employee's legal fees | Paid direct to their solicitor, plus VAT you cannot recover |
| Your own legal fees | Drafting and negotiation |
| Outplacement, if offered | Can be tax-free for the employee |
You must calculate post-employment notice pay correctly. If notice is not worked, the basic pay for that period is taxable earnings whatever the agreement calls it. Getting this wrong leaves you liable to HMRC, with only the employee's tax indemnity to fall back on.
Structuring the offer
- Open credibly. A first offer at 60 to 80 per cent of your ceiling leaves room without insulting the employee.
- Use non-cash terms. An agreed reference, a release from restrictive covenants, a longer notice period on garden leave or keeping a laptop cost little and are valued.
- Consider a pension contribution for amounts above £30,000. It saves the employee tax and saves you National Insurance.
- Fund proper advice. A realistic fee contribution speeds things up.
- Set a clear deadline of at least 10 calendar days.
Timing and the 2027 changes
The employee's rights depend on the effective date of termination. If notice carries that date past 1 January 2027, a person with six months' service is due to have unfair dismissal protection, and compensation will no longer be capped. Short-service exits planned for early 2027 need the same care as any other dismissal.
Consistency
Record how each offer was calculated. Paying very different sums to people in similar positions, without a reason you can explain, creates equal pay and discrimination risk.
Frequently asked questions
Is there a standard formula for settlement payments?
No. Many employers use a rule of thumb, such as a number of months' salary, but the right figure depends on the claims the employee could bring.
Do we have to pay the employee's legal fees?
There is no legal requirement, but it is expected and practical. £350 to £750 plus VAT is common for a standard agreement.
Can we make the payment tax-free?
Only the genuine termination payment qualifies for the £30,000 exemption. Notice pay must be taxed as post-employment notice pay regardless of how it is described.
Should we offer more because of the 2027 changes?
If the termination date falls on or after 1 January 2027, the employee may have unfair dismissal rights they would not have had before, and compensation is due to be uncapped. Price that in.
Sources
About this guide. This page is general information, not legal advice, and reflects the law and published government plans on the date shown above. Frederick George is a legal referral service, not a law firm. For advice on your own circumstances we will introduce you to an SRA-regulated solicitor.