Guides/Compromise Agreement UK

Statutory Agreement Guide

Compromise Agreement UK: What It Is, Calculation & 2026 Rules

SettlementCheck Legal AnalysisStatutory baseline: SI 2026/310Last reviewed: October 2026

A compromise agreement is the former legal name for a settlement agreement in the UK. Under Section 23 of the Enterprise and Regulatory Reform Act 2013, the document was officially renamed on 29 July 2013. The underlying legal framework remains identical under Section 203(3) of the Employment Rights Act 1996. It is a binding contract where an employee waives employment tribunal rights in return for a severance settlement.

Key facts for 2026

Identical legal status: Compromise agreements and settlement agreements are legally identical documents governed by Section 203(3) of the Employment Rights Act 1996.
Employer covers legal fees: Independent legal advice is mandatory. Your employer covers the legal fees, typically contributing £350 to £750 plus VAT directly to your solicitor.
2026 statutory rates: From 6 April 2026, weekly pay is capped at £751 in Great Britain (SI 2026/310) and £783 in Northern Ireland (SR 2026/57). Maximum statutory redundancy pay is £22,530.
£30,000 tax exemption: The first £30,000 of compensation for loss of employment is tax-free under ITEPA 2003 s.403. Notice pay remains fully taxable under Section 402D.
10-day consideration period: Under the ACAS Code of Practice, employers must allow a minimum of 10 calendar days to consider the written proposal.

What is a compromise agreement in the UK?

A compromise agreement is a legally binding contract between an employer and an employee that settles workplace disputes and terminates employment. The employee agrees to waive their rights to bring claims before an employment tribunal. In return, the employer provides a severance payment, an agreed reference, and pays for the employee's independent legal advice.

The Enterprise and Regulatory Reform Act 2013 renamed these documents to settlement agreements on 29 July 2013. The change also introduced Section 111A of the Employment Rights Act 1996. This section allows employers and employees to hold confidential pre-termination negotiations before any formal workplace dispute arises.

Many employers, HR departments, and employment contracts still use the phrase compromise agreement. This terminology persists through habit, legacy employee handbooks, and older contract templates.

Regardless of the name printed on the document, the contract is governed by Section 203(3) of the Employment Rights Act 1996. Its legal power to settle employment claims remains exactly the same.

Compromise agreement vs settlement agreement: What is the difference?

The table below compares the historical compromise agreement with the modern settlement agreement in force today.

Feature	Compromise Agreement (Pre-2013)	Settlement Agreement (Current)
Governing statute	ERA 1996 Section 203(3)	ERA 1996 s.203(3) as amended by ERRA 2013
Pre-termination discussions	Required an existing dispute under Without Prejudice	Permitted under Section 111A without an existing dispute
Independent legal advice	Mandatory by an insured qualified adviser	Mandatory by an insured qualified adviser
Employer fee contribution	Covered by employer (£350 to £750 typical)	Covered by employer (£350 to £750 typical)
Tax exemption limit	First £30,000 tax-free (ITEPA 2003 s.403)	First £30,000 tax-free (ITEPA 2003 s.403)
Legal effect	Settles specified tribunal claims	Settles specified tribunal claims

Source: Section 23 Enterprise and Regulatory Reform Act 2013. The change in terminology did not alter an employee's statutory rights.

The 5 statutory conditions for a valid agreement

Employees cannot contract out of their statutory employment rights through an informal chat. Under Section 203(3) of the Employment Rights Act 1996, five conditions must be met for an agreement to be binding:

1. The agreement must be in writing

A verbal offer or exchange of text messages cannot waive employment rights. The agreement must exist as a full written contract detailing every term.

2. Particular complaints must be specified

The document must list the specific employment tribunal claims being settled. Broad phrases like "all future claims whatsoever" are legally unenforceable.

3. Advice from an independent, insured adviser

The employee must receive advice from a qualified, independent adviser, such as a solicitor. The adviser must hold current professional indemnity insurance covering the advice.

4. The adviser must be identified

The agreement must name the specific solicitor and their legal practice. The adviser signs an adviser certificate attached to the final document.

5. Statutory conditions must be stated as satisfied

The contract must contain an express clause confirming that all statutory conditions regulating settlement agreements under Section 203(3) have been met.

How is a compromise agreement calculated?

A standard settlement payout consists of four separate components. Each component follows different legal formulas and tax rules.

Component 1: Statutory redundancy pay floor

If your role is redundant, your statutory redundancy pay forms your legal baseline. The formula uses complete years of service (up to 20 years) and an age multiplier:

0.5 weeks of pay per year under age 22.
1.0 week of pay per year between ages 22 and 40.
1.5 weeks of pay per year aged 41 and over.

Under SI 2026/310, weekly statutory pay is capped at £751 from 6 April 2026. The maximum statutory redundancy payout is £22,530.

Component 2: Notice pay (PILON)

Your employer must pay for your contractual notice period or statutory notice period, whichever is longer. Under Post-Employment Notice Pay rules, notice pay is always fully subject to tax and National Insurance.

Component 3: Accrued holiday pay and unpaid salary

You are legally entitled to compensation for all accrued, untaken statutory and contractual holiday up to your final termination date. This is taxed as standard earnings.

Component 4: Ex-gratia compensation payment

This is the discretionary severance amount negotiated on top of statutory minimums. It reflects the value of waiving your employment claims. For ordinary unfair dismissal, the statutory compensatory award cap is £123,543 or 52 weeks of gross salary under SI 2026/310.

Worked example: 2026 compromise agreement calculation

Consider an employee aged 43 with 8 years of continuous service. Their annual salary is £62,400 (£1,200 gross per week). They have a 3-month notice period (13 weeks) and 5 days of untaken holiday.

Severance package calculation breakdown

Payment component	Calculation basis	Gross amount	Tax treatment
Statutory Redundancy Pay	8 yrs x 1.5 x £751 cap	£9,012.00	Tax-free (ITEPA s.403)
Notice Pay (PILON)	13 weeks x £1,200 gross	£15,600.00	Taxable (ITEPA s.402D)
Accrued Holiday Pay	1 week (5 days) untaken	£1,200.00	Taxable as earnings
Ex-Gratia Compensation	Negotiated severance sum	£15,600.00	Tax-free (within £30k)
Total Gross Severance	Combined agreement sum	£41,412.00	£24,612 tax-free
Legal fee contribution	Paid direct to solicitor	£500.00 + VAT	Employer pays directly

In this scenario, total termination compensation is £24,612 (£9,012 statutory redundancy plus £15,600 ex-gratia compensation). Because £24,612 is under the £30,000 threshold under Section 403 of ITEPA 2003, the full amount is exempt from income tax and National Insurance.

Tax rules on compromise agreement payouts

Understanding which payments qualify for tax exemption helps you evaluate your net take-home figure.

Payments qualifying for £30,000 exemption

Statutory redundancy payments.
Enhanced redundancy compensation.
Ex-gratia payments for loss of office.
Compensation for hurt feelings directly linked to termination.

Payments subject to income tax and NI

Pay in Lieu of Notice (PILON / PENP).
Outstanding salary and overtime pay.
Accrued but untaken holiday pay.
Contractual bonuses or commission.

Under Section 402D of ITEPA 2003, Post-Employment Notice Pay rules treat any payment representing notice as earnings. Employers must deduct income tax and employee National Insurance at source before releasing notice funds.

How to negotiate a compromise agreement

Follow these practical steps to assess your position and negotiate a fair outcome.

1
Calculate your statutory floor
Calculate your statutory redundancy entitlement, contractual notice pay, and untaken holiday. This total represents your absolute legal minimum. Any settlement must sit above this floor.
2
Take your 10-day consideration period
Do not sign immediately. Under ACAS Code of Practice 1, you are entitled to at least 10 calendar days to review the proposal and take legal advice.
3
Instruct an independent solicitor
Choose a specialist employment solicitor. Your employer covers the legal fees for this advice under the agreement terms.
4
Submit a factual counter-proposal
Identify procedural flaws, unexpired notice periods, or potential employment claims. Present a realistic counter-offer based on the time required to find new employment.
5
Agree non-financial terms
Negotiate non-financial clauses alongside the payout. Ensure you secure an agreed job reference, mutual confidentiality, non-derogatory covenants, and waiver of restrictive covenants where appropriate.

Calculate where your compromise agreement stands

Use our free UK settlement calculator to check your statutory entitlement, tax-free allowances, and typical payout range under 2026 rules.

Calculate my settlement payout →

Frequently asked questions

What is the difference between a compromise agreement and a settlement agreement?

There is no legal difference today. Under Section 23 of the Enterprise and Regulatory Reform Act 2013, compromise agreements were legally renamed settlement agreements on 29 July 2013. The underlying legal mechanism remains identical under Section 203(3) of the Employment Rights Act 1996.

How is a compromise agreement payout calculated?

A compromise agreement calculation combines statutory redundancy pay, contractual notice pay, accrued untaken holiday pay, and an ex-gratia compensation payment. The ex-gratia amount reflects your length of service, your salary, and the potential legal risk to the employer.

Do I have to pay tax on a compromise agreement payment?

Under Section 403 of ITEPA 2003, genuine compensation payments for loss of employment are tax-free up to £30,000. Contractual earnings, accrued holiday pay, and Pay in Lieu of Notice (PILON) under Section 402D remain fully subject to income tax and National Insurance.

Who pays the legal fees for a compromise agreement?

Your employer covers the legal fees for your independent legal advice. Under Section 203(3) of the Employment Rights Act 1996, you must receive advice from a qualified solicitor before signing. Employers typically contribute between £350 and £750 plus VAT directly to your solicitor.

Can I reject a compromise agreement offer?

Yes. A compromise agreement is voluntary. You are under no legal obligation to sign. If you reject the offer, your employer must follow a standard formal process such as redundancy consultation or performance management.

How long do I get to consider a compromise agreement?

Under ACAS Code of Practice 1, employers should allow a minimum of 10 calendar days for employees to consider the formal written offer and obtain independent legal advice.

What is the statutory weekly pay cap in 2026?

From 6 April 2026, the statutory weekly pay cap is £751 in Great Britain under SI 2026/310. In Northern Ireland, the statutory cap is £783 under SR 2026/57. The maximum statutory redundancy payment is £22,530.

Can my employer dismiss me for asking for a higher payout?

Negotiating a compromise agreement is a standard discussion. An employer cannot legally dismiss you simply for proposing a counter-offer. If negotiations do not reach an agreement, the employer must resume a formal workplace process.