A settlement agreement is a legally binding contract between you and your employer that typically ends your employment. It then waives your right to bring certain claims.
Before signing, you must receive independent legal advice from a qualified solicitor. Your employer usually pays for this, contributing between £250 and £1,000 plus VAT toward legal fees.
Most employees want to know three key things: how much solicitors charge, whether settlement payments are taxed, and what counts as a fair redundancy package.
How Much Do Solicitors Charge for a Settlement Agreement?
A very common question is how much a solicitor will charge for advising on the settlement agreement. Most agreements include a clause confirming that your employer will pay a legal fee contribution, usually between £250 and £1,000 plus VAT.
This contribution is designed to cover the cost of your independent legal advice. This is something you must receive for the agreement to be legally binding.
It’s important to ask your solicitor whether the employer’s contribution will cover all of the work or whether there could be anything extra to pay. A good solicitor will always give you this clarity upfront.
At Settlement Agreement Advice, we guarantee that the employer’s contribution will not be exceeded without your express permission. You will never face unexpected charges for basic settlement agreement advice.
Do the employer’s contributions cover the costs of a settlement agreement?
If you simply want advice on the contents of the agreement and do not want to negotiate changes, the employer’s contribution will usually cover all legal fees. You will not have to pay anything yourself.
When additional fees might apply
If you decide to negotiate for:
- a higher payment
- an improved reference
- different confidentiality wording
- removal or adjustment of restrictive covenants
…our employment solicitors will explain any costs before carrying out that work.
In some cases, negotiations can be offered on a no-win, no-fee basis, meaning you only pay if the negotiation succeeds.
If you need clarity about employment solicitor charges, you can always contact us directly for guidance.
Do You Pay Tax on a Settlement Agreement?
Whether a settlement agreement payment is taxed depends entirely on the type of payment. Contractual payments are always taxed, while non-contractual compensation is often tax-free up to £30,000.
Tax Treatment of Settlement Agreement Payments
The table below outlines how common payment types included in a settlement agreement are treated for tax and National Insurance Contribution (NIC) purposes:
| Payment Type | Taxable? | NIC Deducted? | Key Detail |
| Contractual Payments | Yes (standard rates) | Yes | Includes notice pay (PILON), salary, bonuses and holiday pay. |
| Compensation (Non-Contractual) | No (up to £30,000) | No (up to £30,000) | This covers ex-gratia payments for loss of employment or injury to feelings. Anything above £30,000 is taxed. |
Understanding the Tax Indemnity Clause
Most settlement agreements include a tax indemnity clause. This clause is standard, but you must understand its implications before you sign.
In simple terms, the indemnity states that:
- If HMRC later investigates the payment structure and decides more tax should have been paid on a sum initially treated as tax-free,
- the employee (not the employer) may be responsible for paying that extra tax liability.
We can explain precisely what this indemnity means for your specific situation before you sign the agreement, ensuring you fully understand the potential risks.
What’s a Good Redundancy Package?
Many employees are offered a settlement agreement as part of the redundancy process. What counts as a “good” redundancy package depends on whether your employer provides contractual redundancy pay or only statutory redundancy pay.
Contractual redundancy
This is often more generous. A good example might be:
- three or four weeks’ pay per year of service, sometimes with age-related enhancements.
Statutory redundancy
This is calculated by:
- number of years of service
- your age during each year of service
- your weekly wage (up to the statutory cap)
The age multiplier works as follows:
- 1.5 weeks’ pay for each year aged 41+
- 1 week’s pay for each year aged 22 to 40
- 0.5 weeks’ pay for each year under 22
What should be included?
A fair redundancy package should include:
- all salary owed
- notice pay
- any bonus or commission due
- payment for holiday entitlement
- a tax-free compensation amount (up to £30,000)
- any agreed benefits or ex-gratia payments
Our employment solicitors can tell you whether the redundancy payment offered is reasonable given your circumstances. We will tell you if a better package is achievable.
Is a Settlement Agreement the Same as Redundancy Pay?
No. A settlement agreement is a legal contract used to resolve employment matters and waive future claims. Redundancy pay is a financial entitlement that may be statutory or contractual.
Employers often use settlement agreements during redundancy situations to provide enhanced payments or ensure a clean break. A redundancy package should still include notice pay, holiday pay and any bonuses owed. This is with a possible tax-free sum of up to £30,000. Your solicitor will check whether your redundancy offer is fair and whether the settlement agreement provides benefits beyond your basic statutory entitlements.
Need Help Understanding Your Settlement Agreement?
Settlement agreements can be confusing, and it’s normal to have questions about fees, tax, redundancy and your legal rights. Independent legal advice is required to make the agreement valid, but it also protects you from signing something unfair.
Do you need help reviewing your settlement agreement or understanding what a fair offer looks like? Our specialist employment solicitors can explain your rights and make sure you are fully protected before you sign.
