Settlement agreements

A settlement agreement is a written, legally binding deal in which you agree to give up the right to bring certain employment claims, usually in return for a payment. It is voluntary. To be valid, it must be in writing, name the specific claims it covers, and follow independent advice from an insured adviser who is named in the document. You do not have to sign one, and you can negotiate the terms.

What it can contain

Acas describes an agreement reached through discussion and negotiation, previously known as a compromise agreement. It can include:

• a financial payment
• an agreed reference
• your agreement not to make an employment tribunal claim
• a confidentiality clause

It also usually sets a leaving date and deals with notice, either by letting you work it or by paying in lieu of notice.

What makes it valid

Three things have to be true for the agreement to hold up. It has to be in writing and relate to a specific complaint or claim. You must have had advice from a relevant independent adviser. And the agreement has to say that these conditions are met and list the legal claims it covers.

A general line such as “in full and final settlement of all claims” would make the agreement invalid, according to Acas. The claims have to be listed. Acas also says claims can be ones already brought to a tribunal or ones you might reasonably be expected to bring.

The legal advice rule

The adviser has to be independent of your employer. Acas lists a qualified lawyer, a certified trade union representative or a certified advice centre worker, and says the adviser must not be employed by, acting for or connected with your employer. They must be insured, and the agreement names them.

Your employer does not have to pay for this advice. Many offer to contribute, and gov.uk lists legal costs paid by an employer directly to your solicitor among payments that are not taxed. A certified trade union representative counts as a valid adviser, so if you are in a union, ask your rep first.

How the money is taxed

What is taxed depends on what the payment is for. Pay you were owed anyway, such as wages, holiday pay and notice pay, is taxed as earnings. The notice element is taxed whether it is paid as PILON or as part of the settlement.

For the rest, gov.uk says you do not usually pay tax on the first combined £30,000 of statutory redundancy pay, additional severance or enhanced redundancy pay, and non-cash benefits. Anything above that is taxed, and your employer pays Class 1A National Insurance on the excess. Acas notes that the £30,000 allowance applies in certain circumstances and recommends a tax adviser or HMRC guidance in complex cases. Our redundancy pay tax guide explains how the pieces are split.

Acas’s template includes a clause for agreeing who pays if tax or National Insurance later turns out to be due. Check what yours says, because a payment described as tax-free in the offer can turn out otherwise.

What you give up

You lose the right to bring the listed claims. Acas says that if you sign one, you cannot bring a constructive dismissal claim to an employment tribunal, for example. Read the list carefully, and ask your adviser which rights are not covered. A confidentiality clause is allowed, but Acas says it must not stop you making a protected disclosure, and employers cannot use one to stop you reporting a crime to the police.

Acas says that raising a problem with your employer does not change the time limits for a tribunal claim, so ask your adviser how any deadline fits with the talks. Our guides on ACAS early conciliation and tribunal time limits explain the process.

In the NHS and the wider public sector

Not every leaving payment is a settlement agreement. The NHS handbook describes Mutually Agreed Resignation as a form of voluntary severance and says it is not redundancy. If your post is genuinely redundant, you may have contractual and statutory rights that you should not trade away without understanding them. See redundancy rights.

Before you sign

• Ask for the offer in writing, with the leaving date, payment, reference and list of claims
• Check the tax treatment with your adviser
• Check what happens to your pension and any benefits
• Keep any reference wording attached to the agreement

Acas publishes a template agreement and a helpline that can answer questions on the process.