If you’ve been offered a settlement agreement, two questions tend to arrive at once. Is this enough? And how much of it will I actually keep? They’re the right questions to ask, and the answers are more interesting than most people expect, because a settlement is rarely just one number.
Let’s break down what actually drives the figure, and how the tax works, so you can judge whether an offer is fair before you decide anything.
There’s no fixed “going rate”, and be wary of anyone who quotes one
People often go looking for an average settlement payout. The honest answer is that there isn’t a reliable one, and any figure quoted as “the average” is close to meaningless. A settlement for someone taking a clean, fairly handled redundancy looks nothing like one for someone with a strong discrimination claim. The range runs from a few thousand pounds to six figures, because the situations are so different.
What’s far more useful than a made-up average is understanding the ingredients. Once you can see what a settlement is built from, you can judge your own offer properly.
What a settlement is actually made of
Most settlement payments are a mix of two things: what you’re owed anyway, and compensation on top.
The “owed anyway” part usually includes your salary up to your leaving date, pay for your notice period (or a lump sum in lieu of it), any accrued holiday you haven’t taken, and any bonus or commission you’ve genuinely earned. None of this is a favour. It’s yours.
The compensation part is the extra sum on top, often called an ex gratia payment, that your employer pays in return for you agreeing to waive your right to bring claims. This is the part that’s really negotiable, and the part that reflects your actual bargaining position.
What drives the compensation figure
This is where it gets specific to you. The size of that compensation payment is shaped by a handful of things:
The strength of any claims you’d be giving up is the big one. If you have a solid claim, say for unfair dismissal or discrimination, your employer is effectively paying to make that risk disappear, which pushes the figure up. Discrimination claims matter especially here, because compensation for them is uncapped, so a strong one can be worth well beyond the usual range.
Your length of service and salary feed in too, both for statutory entitlements and for what counts as reasonable compensation. So does how long you’re likely to be out of work, and how keen your employer is to settle quickly and quietly. If they want speed and certainty, that’s leverage for you.
And finally, what you’re being asked to give up. Agreeing to strict confidentiality or tight restrictions on your next job has a value, and that value is something you can negotiate around.
Two people on identical salaries with identical service can walk away with very different settlements, purely because of these factors. That’s why knowing your position is worth so much.
Now the tax: what’s tax-free and what isn’t
Here’s where a lot of confusion lives. The popular belief is that settlement payments are tax-free. The reality is more nuanced, and getting it wrong can cost you.
The genuine tax break is this: the first £30,000 of a real compensation payment for losing your job can often be paid free of income tax and National Insurance. That’s where the “£30,000 tax-free” rule comes from, and it’s real.
But several things are taxed as normal earnings and don’t get that treatment:
- Your salary up to the leaving date.
- Payment in lieu of notice. Since 2018, all notice pay is taxable, full stop, even if the agreement tries to label it as compensation.
- Accrued holiday pay.
- Earned bonuses and commission.
A couple of traps are worth flagging. The £30,000 is a combined cap, it covers your compensation payment and any statutory redundancy pay together, not £30,000 each. And if a settlement agreement tries to move taxable pay into the tax-free box to save tax, HMRC can challenge it later, and the bill lands on you. So the way the agreement is worded genuinely affects how much you keep.
A quick worked example
Imagine you’re offered £45,000 in total. It might break down as notice pay of £8,000 (taxable), accrued holiday of £1,000 (taxable), and a compensation payment of £36,000. Of that £36,000, the first £30,000 can often be tax-free, with the remaining £6,000 taxable. So the headline “£45,000” and what actually lands in your account are two different numbers, and how the agreement splits and labels each part matters a great deal. This is exactly the kind of thing worth having checked.
How to tell if your offer is fair
The real test isn’t “is this a big number?”. It’s “is this more than I’d likely end up with if I didn’t sign?”. Answering that means knowing what your potential claims are worth and how likely they are to succeed, weighed against the time, cost, and stress of pursuing them. That’s genuinely hard to judge on your own, and it’s the single biggest reason to get a specialist view before you commit.
There’s a practical bonus here too. A settlement agreement isn’t legally binding unless you’ve taken independent legal advice on it, so employers almost always pay a contribution towards your legal fees. That means getting proper settlement agreement advice, someone to tell you honestly whether the money is fair, whether the tax is right, and whether you can negotiate more, usually costs you little or nothing. A specialist who handles these every week will often spot value you’d never have known was there, and negotiate it for you.
A fair settlement, properly structured and correctly taxed, can be a genuinely good outcome. Just make sure the number you’re agreeing to is the right one, and that you keep as much of it as you’re entitled to.