Situation · Settlement decision

Settlement agreement vs redundancy

A settlement agreement (formerly a compromise agreement) is the most common formal way to exit a job with a payout. You waive your right to sue; the employer pays. Statutory redundancy can be included or paid separately.

What the agreement actually does

It contractually settles all statutory and contractual employment claims you have or might have against the employer, listed by reference to the relevant statute. To be binding it must comply with ERA 1996 s.203: in writing, relate to a particular complaint, signed after you receive independent legal advice, and identify the adviser by name. Acas guidance: settlement agreements.

What you typically get paid

Statutory redundancy (if redundancy is the underlying reason): full statutory entitlement, tax-free.
Enhanced redundancy / ex-gratia: usually expressed as a single "termination payment".
PILON: the unworked notice period, taxed as earnings under PENP.
Accrued holiday: taxed as earnings.
Outstanding salary, bonus, pension: each item separately listed.

Tax treatment

The termination-payment slice (statutory + enhanced + ex-gratia) sits in the £30,000 tax-free bucket under ITEPA 2003 s.401. The PILON / PENP slice is taxed as earnings whether or not the contract had a PILON clause. HMRC guidance: income tax treatment of termination payments.

The solicitor fee

Employers almost always pay a contribution toward the cost of your independent legal advice, typically £350 to £750 plus VAT. The contribution is tax-free if paid directly to the solicitor and used solely for the advice on the agreement. Negotiate the contribution upward if your circumstances are complex (long service, disputed performance ratings, discrimination element).