Do I Pay Tax on a Settlement Agreement?


Yes, in England and Wales you may have to pay tax on a Settlement Agreement but it depends on the types of payments you receive as part of your settlement.

If you’re offered a Settlement Agreement by your employer, it’s usually made up of different payments. Some of these payments will be treated as being taxable and others may be paid as a tax-free amount by your employer.

The first £30,000 of a termination payment is generally treated as being tax-free as long as no contractual payments are included in this payment. Contractual payments include holiday pay or payment in lieu of your notice period. Many employers will prefer to pay your notice period rather than ask you to work it, so this would be taxed at your normal rate. Such payments are referred to as Payments in Lieu of Notice (“PILON”) and should also be subject to national insurance deductions.

You must get specialist legal advice from an Employment Law Solicitor or independent legal advisor as part of any Settlement Agreement. We can help to make sure that the correct tax treatment is applied to your Settlement Agreement. This reduces the risk of HMRC needing to recover tax from you later and offers you peace of mind.

We should point out that ultimate decision on taxation of termination payments rests with HMRC. Our advice doesn’t serve as a guarantee that your termination payments will or won’t attract tax. Settlement Agreements will commonly contain an indemnity clause. This means that your employer can recover tax or national insurance contributions from you at a later date if there is any further tax due under your Settlement Agreement.

For initial legal advice get in touch with our Employment Law Solicitors.

Call us on 0808 258 3531 or request a callback

What is a Settlement Agreement?

A Settlement Agreement is often used to end an employment relationship or to resolve an employment dispute. You or your employer can request a Settlement Agreement, but you should be aware that if you agree to a Settlement Agreement, you typically waive your rights to take your employer to an Employment Tribunal.

Your Employment Law Solicitor will review your Settlement Agreement and go through the terms with you. We will work to ensure that you obtain an outcome that works for you. Our Employment Law Solicitors have a proven track record of helping people like you get a good outcome from their Settlement Agreements.

Settlement Agreement Payments

Payments made in a Settlement Agreement are usually made up of a lump sum and any other payments related to your employment contract. The lump sum is usually known as an ex gratia or termination payment.

Other payments related to your employment contract will include things like:

  • Outstanding salary, commission or bonus
  • Pension payments
  • Holiday pay
  • Payment made in lieu of your notice

Contractual payments are generally taxable and will be taxed at your current tax rate and subject to National Insurance contributions.

Who Pays Your Legal Costs?

You must get independent legal advice before signing a Settlement Agreement. It is common for employers to contribute to your legal costs to cover any advice given by your legal adviser.

If your legal costs are more than your employer has contributed, our Employment Law Solicitors can ask for an increased amount from your employer so that you wouldn’t need to pay these additional costs yourself. We will discuss costs with you from the outset.

Do I Need a Solicitor?

An Employment Law Solicitor can help you to get the best possible outcome from your Settlement Agreement. They can also help to ensure that any termination payments are dealt with appropriately in terms of tax treatment.

Our Employment Law Solicitors have a strong track record in dealing with Settlement Agreements. If you do have a Settlement Agreement or are in the negotiation process, then please do not hesitate to contact us with any queries.

Settlement Agreement Case Studies

Read about a £31,000 Settlement Agreement for one client and another Settlement Agreement of £30,000.

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