Redundancy Settlement Agreements Explained: Your Full Guide for Employees

What is redundancy?

Redundancy is a specific, lawful reason for dismissal under the Employment Rights Act 1996, s.139: your employer needs fewer employees to do work of a particular kind, or the work is moving or disappearing altogether, and your role genuinely ceases to exist. It is not a judgement on your performance. Once you have two years' continuous service, a genuine redundancy triggers statutory redundancy pay by formula.

A fair redundancy also carries a process: a warning that redundancies may happen, meaningful consultation, a fair selection method where more than one person could be selected, and a search for suitable alternative roles. If that process is skipped or rushed, the redundancy itself can be challenged, which is one reason employers often prefer to conclude it with a settlement agreement instead. See our redundancy process guide for what a fair process should look like.

What is a settlement agreement?

A settlement agreement is a legally binding contract between you and your employer that ends your employment on agreed terms. In exchange for a payment, you waive your right to bring listed tribunal claims, such as unfair dismissal or discrimination. It is only valid once you have taken advice from an independent, qualified adviser, almost always a solicitor, and your employer pays for that advice in nearly every UK settlement agreement. See our what is a settlement agreement guide for the document itself, clause by clause.

A settlement agreement is not unique to redundancy; employers use the same document to close out performance concerns, restructures, disciplinary situations and disputes of almost any kind. What makes a redundancy settlement agreement distinct is simply that the underlying reason for the exit is redundancy, so the figure it records should include your statutory redundancy pay alongside everything else.

What is the difference between redundancy and a settlement agreement?

Redundancy is a reason your job can end; a settlement agreement is the separate contract that can be used to finalise it. Redundancy alone entitles you to statutory pay only, decided by formula, with no claims waived. A settlement agreement usually pays more, requires you to give up your right to bring claims, and is only legally valid once you have had independent advice. See the full redundancy vs settlement agreement comparison for the complete table, including who pays for advice and what is and is not negotiable.

Your statutory redundancy floor

Before judging any offer, work out the statutory minimum it has to beat. Statutory redundancy pay is set by a formula in ERA 1996, s.162: a number of weeks' pay for each full year of service, banded by the age you were during that year, capped at a maximum weekly figure and 20 years' service.

Run your own figures on the redundancy pay calculator, it applies this exact formula and cap. You need 2 years' continuous service to qualify at all.

Enhanced vs statutory redundancy: what's the difference in payment?

Statutory redundancy pay is the legal floor: fixed by the formula above, with no room to negotiate the calculation itself. Enhanced redundancy pay is anything your employer chooses, or is contractually committed, to pay on top of that floor, typically because it operates its own enhanced scheme, or because it is buying your agreement to waive claims through a settlement agreement.

Read our guide on what a fair settlement agreement amount looks like to judge whether an enhancement is genuinely worthwhile for your circumstances.

Pay in lieu of notice: how PILON is taxed

Payment in lieu of notice, PILON, is what your employer pays you instead of letting you work your notice period. Since 6 April 2018, all PILON is taxable as earnings, for both income tax and National Insurance, regardless of whether your contract has a PILON clause. This is the Post-Employment Notice Pay (PENP) regime, in section 402D of ITEPA 2003 (the PENP rules run ss.402A to 402E). PILON does not qualify for the £30,000 termination payment exemption.

The formula calculates a notional notice-pay figure that is always taxed as earnings, closing off the route that used to let a carefully worded, non-contractual PILON be paid tax-free. See our pay in lieu of notice guide for the PENP formula worked through with an example, and how it interacts with the rest of your settlement figure.

The tax split: what's tax-free and what isn't

A redundancy settlement figure is not one taxable amount, it is several elements taxed differently. Genuine compensation for loss of employment, which includes statutory and enhanced redundancy pay, is tax-free up to £30,000 under sections 401 to 403 of ITEPA 2003. Salary, accrued holiday pay, any bonus, and PILON are all taxed in full as normal earnings, on top of that allowance, no matter how the agreement labels them.

The £30,000 threshold applies once to the combined termination element, not per payment, so statutory and enhanced redundancy pay share the same allowance rather than each getting their own. How the total settlement figure is apportioned between the tax-free element and the taxable elements changes what you actually take home, which is why the tax wording is worth checking as carefully as the headline number. See our settlement agreement tax guide for how each element is normally allocated.

Which is better for me?

There is no single answer, it depends on what is actually on the table. A settlement agreement is usually the better route when the enhanced payment meaningfully exceeds your statutory floor once notice, holiday and any bonus are added, and when it also reflects the strength of any claim you might otherwise have, for example if the redundancy process itself looked unfair. Straight statutory redundancy, without a settlement agreement, keeps every one of your rights intact and costs you nothing to walk away from, but it only ever pays the statutory minimum.

In practice, most people weighing this up run three checks: the statutory floor from the calculator, the size of the enhancement above it, and whether the redundancy process leading up to the offer would stand up if challenged. Voluntary redundancy sits alongside this too. See our voluntary redundancy guide if you have been asked to volunteer rather than been selected.

Do I need advice?

For the redundancy process alone, no, advice is not a legal requirement, though it can still help you spot a flawed selection or a rushed consultation. For a settlement agreement, yes, it is a legal requirement: the agreement is not binding until an independent, qualified adviser has confirmed you understand its terms and effect. Almost every UK employer pays the adviser's fee as part of the agreement, so in practice the advice costs you nothing.

If you already have an agreement in front of you, our just received a settlement agreement guide walks through what to check clause by clause before you sign anything.

Frequently asked questions