Are Settlement Agreement Payments Tax Free?

When you receive an ex gratia payment from a Settlement Agreement, the first £30,000 of this payment is usually tax-free. Other payments, such as payments made in lieu of notice will usually attract tax treatment.

If your employer has offered you a Settlement Agreement and you have any questions, get in touch with our Employment Solicitors.

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Settlement Agreements

A Settlement Agreement is a contractual agreement between an employer and an employee, or former employee. By signing it, the employee waives their right to bring specific claims against the employer. In return, the employee will receive a termination payment.

As an employee, you are entitled to enter into Settlement Agreement negotiations with your employer. Alternatively, you can ask our Employment Solicitors to negotiate a deal for you.

Typically, the termination package includes a sum of money. This can consist of different types of payments, including ex gratia payments, payments made in lieu of notice together with any benefits such as holidays or pensions.

Settlement Agreements and Tax

In England and Wales different tax rules apply to different types of payment.

Ex Gratia Payments 

The first £30,000 of an ex-gratia payment is tax-exempt as a general rule. Anything above this is subject to tax but not NI contributions under current rules.


Any salary or benefits that you earn up until your last day at work is subject to tax and national insurance contributions.

Payment in Lieu of Holiday

If you have not taken all your annual leave when your employment contract ends, you may be given payment in lieu of holiday. This is subject to tax and national insurance contributions.

Restrictive Covenant Compensation

Your employer may demand that certain clauses are included in the terms and conditions of your Settlement Agreement. These might include a confidentiality clause and restrictive covenants, which prevent you from competing with your current employer. If so, you may be given additional money. This is subject to tax and national insurance contributions.

Settlement Agreement Tax Advice

If you ask our Employment Solicitors for help regarding your Settlement Agreement, we can advise on any potential tax implications. We can also ensure your tax deductions are applied correctly, ensuring you do not pay too little (or too much) tax. This gives you peace of mind that HM Revenue & Customs will not seek further payment from you in the future.

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