A settlement agreement is a legally binding contract. Your employer provides you with a lump sum payment to prevent you bringing claims against them. There are lots of different names for these agreements, including termination agreements, compromise agreements, and golden goodbyes.

The settlement agreement you receive might be different to one offered to a colleague. However, they typically cover notice and holiday pay, termination payments, waivers, contractual benefits, return of property, legal costs, and references.

Settlement agreements help you achieve a clean break from your employer. They can benefit both parties – they prevent you bringing claims against them in the future, but they can also have advantages for you.

For example:

• All discussions and negotiation are confidential, which means they can’t be relied upon in Court
• In a redundancy situation, you can often have an input on the wording of a reference, which can help you re-entering employment
• The first £30,000 of a settlement pay is usually tax-free
• You can part ways amicably and with minimal confrontation.

A PAYE settlement agreement only becomes binding if you receive independent advice before signing. The person giving the advice must be a qualified lawyer, which in England and Wales means a practicing barrister or solicitor.

Termination payments are usually tax-free up to £30,000, but any other payments you’re entitled to receive such as salary, holiday pay etc. are taxable.

In situations where both parties agree that the settlement isn’t taxable, don’t be surprised to be asked for a ‘tax indemnity’ as part of the agreement. This essentially means that if HMRC decides tax is due, you will be liable for it.

We offer fixed fees for settlement agreements and the costs are usually covered by your employer.