Redundancy or settlement agreement: what is the difference?

Is a settlement agreement the same as redundancy?

No. Redundancy is a reason for dismissal, your role genuinely disappears under the Employment Rights Act 1996, s.139, and it triggers statutory redundancy pay once you have two years' service. A settlement agreement is a separate legal contract in which you waive your right to bring claims in return for a payment. The two often go together but are not the same thing.

An employer facing genuine redundancies will often offer a settlement agreement to conclude the exit quickly and with certainty. When it does, the settlement agreement usually pays more than statutory redundancy alone, an enhanced sum, in exchange for you giving up any potential tribunal claims. That combination, a redundancy dismissal finalised through a settlement agreement, is what most people mean when they search for a "redundancy settlement agreement". See our redundancy settlement agreement guide for how that document is structured.

Redundancy vs settlement agreement: the key differences

Redundancy is a reason your employer can lawfully end your job; a settlement agreement is the contract used to finalise the exit. Redundancy alone entitles you to statutory pay only. A settlement agreement usually pays more, requires you to waive your claims, and is only valid once you have taken independent legal advice, normally paid for by your employer.

Use the redundancy pay calculator to see your statutory floor, then read our guide on what a fair settlement agreement amount looks like to judge whether an offer's enhancement is reasonable.

Why do employers offer a settlement agreement in a redundancy?

A settlement agreement gives the employer certainty. In exchange for an enhanced payment above statutory redundancy, you agree not to bring an unfair dismissal, discrimination or other tribunal claim. It closes the matter cleanly, avoids the cost and risk of litigation, and lets both sides agree the reference and any other exit terms at the same time.

A redundancy process on its own can still go wrong for an employer, a flawed consultation, an unfair selection pool, or a claim that the "redundancy" was really a cover for something else can all end up in an employment tribunal. A settlement agreement removes that risk in one step. That is also why, if you want more than the offer on the table, there is usually room to negotiate, the certainty is worth something to your employer too.

Is a redundancy settlement agreement taxable?

Statutory and enhanced redundancy pay both fall within the £30,000 tax-free termination payment allowance, provided the dismissal is a genuine redundancy. Payment in lieu of notice, outstanding salary, accrued holiday and any bonus are taxed as normal earnings, so how the agreement splits the total between these categories affects what you actually take home.

The tax-free allowance applies to the combined redundancy element, not per payment, so statutory and enhanced redundancy pay share the same £30,000 threshold. Anything above it, and anything that is not a genuine termination payment, such as PILON, is taxed as earnings. See our settlement agreement tax guide for how each element is normally allocated.

Should I sign a redundancy settlement agreement?

Check your statutory redundancy floor first, then judge whether the enhancement on top is fair for your role and service. Do not sign before an independent solicitor has reviewed it, this is a legal requirement for the agreement to be valid, and your employer almost always pays the adviser fee, so there is little reason to skip it.

In practice that means three steps: run the numbers on the redundancy pay calculator to see your statutory minimum, compare the offer against it to see the size of the enhancement, then get the agreement itself reviewed before you sign anything. If your employer has not offered a settlement agreement and you are simply being made redundant, start with our redundancy guide to understand the process and your rights.

Redundancy vs settlement agreement: frequently asked questions