Settlement agreements: the complete UK guide

What is a settlement agreement?

A settlement agreement is a written, legally binding contract between an employer and an employee, worker or job applicant. You agree not to bring specified legal claims against your employer. In return you usually receive a payment, and often an agreed reference.

They were called compromise agreements until 2013, and you will still see that name in Northern Ireland. Apart from a deal reached through Acas (a COT3), a settlement agreement is the only way to give up statutory employment rights such as the right to claim unfair dismissal or discrimination. An ordinary contract or a signed letter cannot do it.

Most settlement agreements end the employment. They do not have to. One can also settle a dispute, such as a disagreement over a bonus, while you carry on working.

When settlement agreements are used

• Redundancy. To pay more than the statutory minimum in return for a clean break. See redundancy.
• Performance or conduct concerns. As an alternative to a capability or disciplinary process. See performance and conduct exits.
• Disputes and grievances. Where there are allegations of discrimination, harassment, whistleblowing or unfair dismissal.
• Long-term sickness. Where a return to work looks unlikely. See sickness and ill health.
• Senior exits. Where notice, bonus, shares and announcements all need agreeing. See bonus, shares and pension.

Either side can suggest one. Employers often raise it in a protected conversation, which is an off-the-record discussion that usually cannot be used in an ordinary unfair dismissal claim.

What makes a settlement agreement legally binding

The conditions come from section 203 of the Employment Rights Act 1996 and section 147 of the Equality Act 2010. All of them must be met:

1. The agreement is in writing.
2. It relates to particular complaints or proceedings. A blanket waiver of "all claims" is not enough, which is why agreements list claims one by one.
3. You have received advice from a relevant independent adviser on the terms and their effect on your ability to bring a claim.
4. The adviser has insurance or professional indemnity cover for that advice.
5. The agreement names the adviser.
6. The agreement states that the statutory conditions have been satisfied.

If any condition is missing, you keep your statutory claims even if you have signed and been paid. That protects employees from signing away rights they did not understand, and it is the reason employers pay for the advice. More in the legal advice requirement.

How much should you expect?

There is no statutory formula for a settlement payment. A sensible offer has two layers.

Layer one: what you are owed anyway

• Salary and benefits up to your leaving date.
• Notice pay, whether you work your notice, spend it on garden leave or are paid in lieu.
• Holiday you have built up and not taken.
• Statutory redundancy pay, if you are redundant and have two years' service.
• Any bonus, commission or share awards your contract entitles you to.

These are not compensation. You would receive them without signing anything, so they should not be presented as the price of your waiver.

Layer two: compensation for giving up your claims

This is the part that makes it a settlement. It is often called an ex gratia or termination payment, and its size depends on what your claims are worth and how likely they are to succeed. As a rough guide used by practitioners, not a legal rule:

The figures a tribunal could award set the ceiling for the negotiation:

For the full method see how much should I get?, or put your own figures into the settlement agreement calculator.

Tax and the £30,000 rule

How a payment is taxed depends on what it is for, not what the agreement calls it.

Two points catch people out. First, the £30,000 is one allowance for the whole termination, not one per payment. Second, since 2018 pay for any notice you do not work is taxed as earnings whether or not your contract has a pay in lieu clause. Employers must calculate this "post-employment notice pay" and cannot relabel it as compensation.

The agreement will include a tax indemnity, under which you agree to meet any further tax HMRC asks for. That is standard, but it is a reason to check the split is right. Full detail in tax on settlement agreements.

Legal advice: why you need it and who pays

You must be advised by a relevant independent adviser. That means a qualified lawyer such as a solicitor or barrister, a Fellow of the Chartered Institute of Legal Executives working in a solicitors' practice, or a trade union official or advice centre worker who has been certified as competent to give the advice. The adviser must not be acting for your employer.

The legal minimum is narrow. The adviser explains what the agreement means and which claims you are giving up, then signs a certificate. A good adviser goes further and tells you whether the offer is fair, what is missing and whether it is worth negotiating.

Employers are not legally required to pay for this, but in practice they nearly always do. Contributions of £350 to £750 plus VAT are common for a standard agreement, with more for senior or disputed exits. The fee is paid direct to the solicitor, which keeps it tax-free. See who pays the legal fees.

How long it takes

1. The offerYour employer raises the idea, often in a protected conversation, then sends the draft agreement.
2. Time to considerThe Acas Code of Practice says you should be given a minimum of 10 calendar days to consider the written terms and take advice, unless you agree otherwise. You can ask for longer.
3. AdviceA solicitor can usually review a standard agreement and speak to you within one or two working days.
4. Negotiation, if neededAnything from a single email to several rounds. Two to four weeks is typical where terms change.
5. SigningYou sign, your adviser signs the certificate and your employer signs. The agreement becomes binding and stops being "subject to contract".
6. PaymentUsually 14 to 28 days after signing or your leaving date, whichever is later. The agreement should state the date.

What the agreement will contain

• Termination date and payments, with the tax treatment of each.
• The waiver. A long list of the claims you are giving up, and warranties that you know of no others. See the clauses explained.
• Confidentiality. About the terms, and sometimes the circumstances. The law limits what these can cover. See confidentiality clauses and NDAs.
• A reference, usually with agreed wording attached. See references.
• Restrictions after you leave, such as non-compete or non-solicitation terms. See restrictive covenants.
• No derogatory comments, which should bind the employer as well as you.
• Return of property and, for directors, resignation from office.
• The adviser's certificate and the legal fee contribution.

Should you sign?

Compare the offer with your realistic alternative. Ask yourself four things.

1. What happens if I say no? If the alternative is a fair redundancy on statutory terms, an enhanced offer may be attractive. If the alternative is an employer with no fair reason to dismiss, you have leverage.
2. What are my claims worth? Take the likely award, discount it for the chance of losing, then allow for the months of delay, the stress and any legal costs of a tribunal.
3. How long will it take me to find equivalent work? This drives the value of a dismissal claim more than anything else.
4. What do I lose by leaving? Check income protection, private medical cover, unvested shares, pension contributions and any enhanced maternity or sick pay.

A certain payment now is often worth more than a larger uncertain one later. But an offer that only gives you what you are owed anyway is not a settlement, it is a waiver for free. More in should I sign my settlement agreement? and what happens after you sign.

What changed in 2026, and what is coming

The Employment Rights Act 2025 is being brought in by stages, and several stages change what a settlement is worth.

• In force from 1 October 2026: the time limit for most tribunal claims is six months instead of three, where the dismissal or act complained of happened on or after that date. Read our guide to the six-month time limit.
• From 30 October 2026: employers must take all reasonable steps to prevent sexual harassment, and become liable for harassment by third parties such as customers. See the harassment prevention duty.
• From 1 January 2027: the qualifying period for ordinary unfair dismissal is due to fall from two years to six months, and the cap on the compensatory award is due to be removed. See unfair dismissal changes in 2027.
• Expected during 2027: confidentiality clauses that stop a worker speaking about harassment or discrimination will be void unless the agreement meets conditions still to be set in regulations. See NDA reforms.

Together these mean more employees have claims, there is longer to bring them and, from 2027, higher earners will no longer face a cap. Offers priced on the old rules may be too low. The full timetable is in our Employment Rights Act timeline.

If you are an employer

A settlement agreement buys certainty, but only if it is offered properly and drafted to meet the statutory conditions. Start with our employer's guide to settlement agreements, then see how to offer one, how much to offer and the drafting checklist.

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.