Losing your job, or facing the prospect of it, is one of the most stressful experiences in working life. Whether you have been dismissed by your employer, handed a settlement agreement, or told your role is at risk of redundancy, the process can feel overwhelming. This is especially true when you are unclear on your rights.
It’s important to know the main ways employment ends in the UK, what each means for you legally and financially, and when a settlement agreement comes into play. As of April 2026, new enforcement bodies and updated compensation limits have changed the landscape for employees.
What Is Termination of Employment?
Termination of employment is the formal end of the employment relationship between an employer and an employee. It can happen for a range of reasons. Some may be initiated by the employer, some by the employee, and each carries different legal rights and obligations.
Understanding which category your situation falls into is vital, as it dictates your access to the new “Day One” rights introduced this year.
The Main Ways Employment Ends in the UK
What is Redundancy?
Redundancy occurs when an employer needs fewer employees to do a particular type of work. This may be because the business is closing, restructuring, relocating or because the role itself is no longer needed. It is the role that is redundant, not the individual.
To make someone redundant fairly, an employer must:
- Have a genuine business reason for the redundancy
- Follow a fair selection process
- Meaningfully consult with affected employees
- Consider whether any suitable alternative employment exists within the business
Employees with two or more years of continuous service are entitled to a statutory redundancy payment. The amount depends on your age, weekly pay and length of service.
As of April 6, 2026, the statutory redundancy pay cap has increased. If you have two or more years of service, your “week’s pay” for the calculation is now capped at £751.
Redundancy often raises questions about confidentiality, particularly whether you can discuss what is happening with colleagues, family or friends.
What is Unfair Dismissal?
Unfair dismissal is when an employer ends an employee’s contract. For a dismissal to be fair, the employer must have one of five legally recognised reasons:
- Conduct — the employee’s behaviour, including gross misconduct
- Capability — the employee’s performance or health
- Redundancy — when an employer needs fewer employees to do a particular type of work.
- Statutory illegality — where continuing to employ the person would break the law
- Some other substantial reason — a broad category covering genuine business reasons
Even where a fair reason exists, the employer must also follow a fair procedure. Failing to do so can result in a successful unfair dismissal claim.
Summary dismissal, dismissal without notice or pay in lieu, is only lawful where an employee has committed a serious breach of contract, such as gross misconduct.
Important for April 2026:
While the Employment Rights Act 2025 will eventually lower the unfair dismissal qualifying period to 6 months in January 2027, the current “2-year rule” still applies to most employees facing dismissal today. However, you no longer need any length of service to claim for “automatically unfair” reasons, which now include reporting sexual harassment under updated whistleblowing protections.
What Does Resignation Mean?
Resignation is a voluntary decision by the employee to end the employment relationship. Employees must give the notice specified in their contract, or the statutory minimum if the contract is silent.
What is Constructive Dismissal?
Constructive dismissal occurs when an employee resigns in response to a serious breach of contract by their employer. They are effectively being forced out rather than choosing to leave. Common examples include a significant and unjustified cut in pay, a fundamental change to the job role or working conditions or sustained bullying or harassment.
Constructive dismissal is treated legally as a dismissal by the employer. Employees may have a claim for unfair dismissal as a result.
In 2026, the new Fair Work Agency (FWA) provides additional oversight for cases involving the non-payment of wages or holiday pay during a constructive dismissal dispute.
Settlement Agreements and Termination of Employment
A settlement agreement is a legally binding contract between an employer and employee. In most cases, it is used to end the employment relationship on agreed terms. The employee waives their right to bring specified claims in return for financial compensation and other benefits, such as an agreed reference.
Settlement agreements are commonly used in redundancy situations, where they allow employers to offer enhanced exit packages in exchange for a clean break. They are also used in dismissal scenarios, dispute resolution and, in some cases, where employment continues, but an existing claim needs to be resolved.
Does a Settlement Agreement Always End Your Employment?
Most settlement agreements do bring employment to an end. But not all. In some cases, particularly where an employee has a discrimination claim or an injury to feelings claim, a settlement agreement can be used to resolve the dispute while employment continues.
Settlement Agreement vs Redundancy: What Is the Difference?
Redundancy and settlement agreements are not the same thing, though they frequently occur together. Redundancy is a reason for dismissal. A settlement agreement is a legal mechanism for agreeing on the terms of departure. You can be made redundant without a settlement agreement, and you can receive a settlement agreement for reasons other than redundancy.
Understanding which applies to you, and whether the terms you have been offered reflect your actual entitlements, is the most important thing to establish before signing anything.
Settlement Agreement vs Redundancy: The 2026 Comparison
| Feature | Statutory Redundancy | Settlement Agreement |
| Weekly Pay Cap | £751 (as of April 2026) | Negotiable (No Cap) |
| Notice Period | Must be worked or paid | Often paid as a tax-efficient lump sum |
| Legal Rights | You keep your right to sue | You waive your right to sue |
| New 2026 Rights | Covers basic redundancy | Can include “Agreed References” and exit terms |
Notice and Payment in Lieu of Notice
When employment ends, whether through redundancy, dismissal or a settlement agreement, you are generally entitled to a notice period. This is either the notice specified in your contract or the statutory minimum, whichever is greater.
In many cases, particularly where settlement agreements are involved, an employer will not require you to work your notice. Instead, they will make a payment in lieu of notice (PILON). This is a lump sum equivalent to the pay you would have received during the notice period.
PILON is subject to income tax and National Insurance in most circumstances. Whether it forms part of your settlement agreement payment or is made separately affects how it is taxed.
As of April 2026, you must ensure your PILON is calculated correctly against the new National Minimum Wage rate of £12.71 per hour (for those aged 21+)
Our settlement agreement solicitors will check the Post-Employment Notice Pay (PENP) calculation to ensure you aren’t paying more tax than necessary.
Pro-Tip: Don’t let your employer “lump” your notice pay into the tax-free £30,000 threshold. HMRC is strict in 2026; if it looks like notice pay, they will tax it. Always ask for a clear breakdown in the agreement.
Your Rights Before you Sign Anything
Regardless of how your employment is ending, there are important legal protections in place:
You cannot be forced to sign a settlement agreement. They are voluntary. If you do not accept the terms, you retain your right to bring claims through ACAS or an employment tribunal.
You must take independent legal advice before a settlement agreement is valid. This is a legal requirement, not a formality. Without it, the agreement cannot waive your statutory rights. In most cases, your employer contributes to the cost of that advice, which means specialist legal employment advice costs you nothing personally.
You should be given a reasonable time to consider any offer. The ACAS Code of Practice recommends a minimum of ten days for settlement agreement offers, though this can vary.
The initial offer is not always the final offer. Our employment solicitors can advise you on whether there is room to negotiate a better financial package or more favourable terms. This includes reference wording, non-compete restrictions and confidentiality obligations.
Speak to a Specialist Employment Solicitor Today
Whether you are facing redundancy, have been offered a settlement agreement or are unsure what your employer is entitled to do, getting specialist advice early makes a material difference to your outcome. Our employment solicitors focus exclusively on this area of law. In most cases, your employer pays our fees in full, meaning expert advice costs you nothing.
Get free advice today – speak to a settlement agreement solicitor.
Frequently Asked Questions
What is the difference between being made redundant and being dismissed?
Redundancy is a specific type of dismissal where the need for a role has reduced or ended. It is not related to the individual’s conduct or performance. Other forms of dismissal, for conduct, capability or some other substantial reason, are separate processes with different rights and procedures attached. If you are unsure which applies to your situation, taking early legal employment advice will help you understand your position before you respond to your employer.
Can I negotiate a settlement agreement even if my employer says the offer is final?
Yes, in most cases, you can negotiate your settlement agreement. Employers frequently present settlement agreement offers as fixed, but there is often room to negotiate. This is particularly true on the financial package, the wording of the reference clause, restrictive covenants and the timeline for payment. Our specialist employment solicitors will assess what is reasonable in your circumstances and advise you on what to push back on.
What happens if I do not agree to a settlement agreement?
You are under no obligation to accept a settlement agreement. If you decline, your employer must pursue whatever alternative process is appropriate. This may be a formal redundancy procedure, a disciplinary or capability process, or continued employment if the offer was made to resolve a dispute.
Declining does not automatically mean you will lose your job, though it may mean the matter proceeds through a more formal route. Taking legal advice before deciding will help you understand the likely consequences of accepting or declining.
