How Much Should Your UK Settlement Agreement Be Worth?

Last updated: 2 May 2026

A settlement agreement is a legally binding contract under which an employee waives the right to bring employment tribunal claims in exchange for a financial payment. In the UK, the value is governed partly by statute and partly by negotiation. The most common scenario is a redundancy or managed exit, typically resulting in a payment combining statutory entitlements and an ex gratia sum.

This guide is for employees who have already been offered a settlement agreement after a redundancy process, a performance or disciplinary procedure, or a breakdown in the employment relationship, or who expect one imminently.

What goes into a UK settlement-agreement value?

A settlement agreement value is built from several distinct components, each calculated differently. The total is the sum of your statutory entitlements, your contractual entitlements, and any additional payment that reflects the claims you are giving up. Understanding each layer helps you judge whether an offer is reasonable before you sign.

The main components are:

• Statutory redundancy pay. Calculated using your age, length of service (up to 20 years), and weekly pay (capped at £643 from April 2024) under Employment Rights Act 1996 s.162. You need at least two years of continuous employment to qualify.
• Contractual or enhanced redundancy pay. Some employers offer more than the statutory minimum. Your contract or staff handbook will say whether this applies.
• Notice pay (or payment in lieu of notice, PILON). You are entitled to your contractual notice period, or the statutory minimum under Employment Rights Act 1996 s.86, whichever is longer. PILON is fully taxable as earnings.
• Accrued but untaken holiday pay. Payable under the Working Time Regulations 1998. This is taxable as earnings.
• Bonus or commission. Any contractual entitlement that has accrued before termination. Discretionary bonuses are harder to claim but not impossible if there is an established pattern of payment.
• Ex gratia payment. This is the element that compensates you for waiving your right to bring tribunal claims. It is the most negotiable part and the element most likely to benefit from the £30,000 tax-free threshold.

What is your statutory floor: the minimum you should expect?

Your statutory floor is the total of your statutory redundancy pay, your minimum statutory notice pay, and any accrued holiday pay. This is the amount your employer must pay regardless of any settlement agreement. Signing a settlement agreement for less than this floor would be unusual and warrants immediate legal advice.

To calculate your statutory redundancy pay, use the government's official calculator at gov.uk/calculate-your-redundancy-pay. The formula under Employment Rights Act 1996 s.162 awards:

• 1.5 weeks' pay for each year of service in which you were aged 41 or over
• 1 week's pay for each year of service in which you were aged 22 to 40
• 0.5 weeks' pay for each year of service in which you were under 22

Weekly pay is capped at £643 (from 6 April 2024) and service is capped at 20 years. The maximum statutory redundancy payment is therefore £19,290 as of April 2024.

Your statutory notice entitlement under Employment Rights Act 1996 s.86 is one week per complete year of service, up to a maximum of 12 weeks, after the first year. Your contract may give you a longer notice period, and that contractual entitlement takes precedence.

What pushes settlements above the floor?

Settlements rise above the statutory floor when you have an underlying employment claim that your employer wants to resolve without tribunal proceedings. The stronger and more expensive that claim is to defend, the more leverage you have. Seniority, specialist knowledge, and the reputational sensitivity of the circumstances also play a role.

Key factors that increase settlement value include:

• Unfair dismissal. If you have two or more years of continuous employment and the dismissal process was flawed, you may have a claim under Employment Rights Act 1996 s.94. The compensatory award is uncapped for whistleblowing and most discrimination claims, and capped at the lower of one year's gross pay or £115,115 for ordinary unfair dismissal (from April 2024).
• Discrimination. Claims under the Equality Act 2010 carry uncapped compensation and can include an award for injury to feelings. These claims significantly increase employer risk and therefore settlement value.
• Whistleblowing (protected disclosure). Detriment or dismissal connected to a protected disclosure under Employment Rights Act 1996 s.47B and s.103A carries uncapped compensation and a potential uplift.
• Failure to follow the ACAS Code. Where an employer has not followed the ACAS Code of Practice on Disciplinary and Grievance Procedures, a tribunal can uplift the compensatory award by up to 25%.
• Seniority and replaceability. Senior employees often negotiate enhanced payments because the employer wants a clean, confidential exit and the employee has greater bargaining power.
• Restrictive covenants. If your employer wants you to accept post-termination restrictions (non-compete, non-solicitation), they will typically need to pay more to make those enforceable and commercially reasonable.

How does tax treatment affect your take-home from a settlement?

The tax treatment of your settlement payment depends on what each element represents, not what it is labelled. Notice pay, holiday pay, and bonus are taxable as earnings from the first pound. A genuine ex gratia termination payment that does not relate to services rendered can benefit from the £30,000 tax-free threshold under Income Tax (Earnings and Pensions) Act 2003 s.401.

The key rules are:

HMRC's Employment Income Manual (EIM13000 onwards) sets out the detailed rules. The practical point is that structuring your settlement to maximise the ex gratia element (up to £30,000) can meaningfully increase your net take-home pay. A solicitor can advise on whether the proposed structure is tax-efficient and compliant.

What does a worked example of a typical mid-career exit look like?

A worked example helps illustrate how the components combine and how tax treatment affects the net figure. The numbers below are illustrative only and do not represent a guaranteed outcome for any individual case. Your own figures will depend on your contract, length of service, and the specific facts of your situation.

Scenario: An employee aged 38, earning £55,000 per year, with 7 years of continuous service, made redundant with a 3-month contractual notice period. The employer has not followed a fair process, giving rise to a potential unfair dismissal claim.

In this example, the ex gratia element was negotiated upward from an initial offer of £10,000 because the employer had not followed the ACAS Code. The statutory floor (redundancy pay plus PILON plus holiday) was approximately £20,366. The negotiated ex gratia payment added a further £20,000, nearly doubling the total value. This is illustrative only.

When should you push back, and when should you take the offer?

You should push back when your offer is at or near the statutory floor and you have an identifiable underlying claim, when the process leading to your exit was procedurally flawed, or when the employer is asking you to waive valuable rights (such as post-termination restrictions) without adequate compensation. You should consider accepting when the offer genuinely reflects the risk-adjusted value of your claims and the cost of pursuing them.

Factors that support pushing back:

• The disciplinary or redundancy process was rushed or did not follow the ACAS Code
• You have evidence of discriminatory treatment or a protected characteristic that played a role in the decision
• You made a protected disclosure (whistleblowing) before the process began
• Your contract includes enhanced redundancy terms that have not been applied
• You are being asked to sign broad confidentiality or non-disparagement clauses
• The employer has offered a reference that is weaker than your performance record warrants

Factors that support accepting:

• Your underlying claim is weak or uncertain on the facts
• You have less than two years of service and no discrimination or whistleblowing angle
• The offer is materially above the statutory floor and reflects a genuine commercial compromise
• The time, stress, and cost of tribunal proceedings outweigh the potential uplift
• You need certainty and a clean break quickly

Under Employment Rights Act 1996 s.203, a settlement agreement is only valid if you have received advice from a qualified independent adviser (typically a solicitor) on the terms and their effect. Your employer will usually contribute to your legal fees. Use that advice session to get a frank assessment of your negotiating position before you respond to the offer.