Employment Settlement Agreement: How Much Should You Get? (UK 2026 Guide)

Written by SettlementCheck Editorial TeamUpdated for 2026/27 tax yearStatutory figures verified via legislation.gov.uk

If your employer handed you an employment settlement agreement today, you are probably feeling shocked, suspicious, and uncertain. You need to know if the money on the table is fair before you sign. This guide explains what UK employers typically pay, how the numbers break down, and how tax applies in 2026.

Direct Answer

How much should an employee settlement agreement be?

A typical UK settlement agreement pays between one and three months of gross salary, plus notice pay and accrued holiday. Your total package should also include statutory redundancy pay, capped at £751 per week, with the first £30,000 paid tax-free.

Based on April 2026 statutory rates and UK market benchmarks.Calculate my estimate →

The Three Separate Pots Inside Your Offer

HR often presents your settlement as one single lump sum. In reality, a legally valid agreement always divides your payout into three separate pots. Knowing which pot is which matters, because HM Revenue and Customs taxes each part differently.

1. Notice Pay (PILON)

This is the salary you would have earned during your contractual notice period. Under Section 402D of ITEPA 2003 (PENP rules), notice pay is always treated as taxable earnings. It is subject to income tax and National Insurance deductions.

Statutory minimum notice is 1 week per year of service, up to 12 weeks. Read our complete guide to PILON tax rules in 2026.

2. Statutory Redundancy Pay

If your role is redundant and you have worked for two or more years, you have a legal right to statutory redundancy pay under the Employment Rights Act 1996. For 2026/27, weekly pay is capped at £751 by SI 2026/310.

Statutory redundancy pay is completely tax-free under Section 403 of ITEPA 2003. Check the 2026 statutory redundancy cap or estimate your entitlement with our redundancy pay calculator.

3. Ex-Gratia Compensation Payment

This is the discretionary compensation offered in exchange for signing away your right to take your employer to an employment tribunal. Typical packages range from one to three months of gross salary, although disputed dismissals can secure substantially more.

The first £30,000 of compensation is tax-free under Section 403 of ITEPA 2003. Learn how HMRC handles the tax-free £30,000 settlement exemption.

Typical Settlement Payout Benchmarks by Scenario

How much you receive depends heavily on the reason for your departure and your legal standing. Below are typical market benchmarks observed across UK employment settlements:

Circumstance	Typical Additional Ex-Gratia	Notice & Redundancy
Standard Redundancy	1 to 2 months salary	Full notice + statutory redundancy
Performance / PIP Exit	2 to 3 months salary	Full notice paid as PILON
Workplace Dispute / Grievance	3 to 6 months salary	Full notice paid as PILON
Discrimination or Whistleblowing	6+ months (or Vento bands)	Full notice plus injury to feelings

Why does an employer offer extra ex-gratia pay?

Employers offer ex-gratia money to buy certainty and finality. Defending an ordinary claim at an employment tribunal costs an employer between £8,500 and £15,000 in legal fees alone, regardless of the outcome.

Tribunal proceedings also take 9 to 18 months and demand hours of management time. Offering one to three months of gross pay is often cheaper and faster for the company than a protracted workplace dispute.

Official Statutory Rates for 2026/27

When calculating whether an offer is fair, you must benchmark it against the latest statutory limits set by UK Parliament:

Weekly Statutory Pay Cap (£751):
Under Section 227 of the Employment Rights Act 1996 and SI 2026/310, the statutory weekly cap increased to £751 on 6 April 2026.
The £30,000 Tax Exemption:
Under Section 403 of ITEPA 2003, genuine termination payments are tax-free up to £30,000. Anything above this threshold is taxed at your marginal rate.
Unfair Dismissal Compensatory Award (£123,543):
The statutory compensatory award limit for ordinary unfair dismissal is £123,543 (or 52 weeks of gross pay, whichever is lower). Employers consider this financial risk when negotiating settlements. See our guide to unfair dismissal settlements or check your potential award with our unfair dismissal calculator.

Independent Legal Advice: Your Employer Covers the Fees

Under Section 203 of the Employment Rights Act 1996, a settlement agreement is not legally binding unless you receive advice from an independent, insured solicitor.

Because this advice is mandatory, your employer covers the legal fees for this review. The typical employer contribution is between £350 and £750 plus VAT. This fee is paid directly to your solicitor, meaning specialist legal advice costs you nothing. You also have the right to choose your own adviser rather than an employer-recommended solicitor.

Employers sometimes impose a tight deadline of 24 or 48 hours to create pressure. Under the official ACAS Code of Practice, you should receive a minimum of 10 calendar days to consider the terms and obtain independent advice. Learn your rights if you feel pressured to sign quickly.

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Common Questions

Frequently Asked Questions About Settlement Amounts

How much should an employee settlement agreement be?

What is the difference between statutory pay and an ex-gratia payment?

Statutory pay covers your legally protected redundancy entitlement, capped at £751 per week. An ex-gratia payment is additional compensation offered by your employer to settle all workplace claims. The first £30,000 of combined termination pay is free from tax.

How is notice pay taxed in a settlement agreement?

Payment in lieu of notice (PILON) is always taxed as ordinary earnings under Section 402D of ITEPA 2003. You pay income tax and National Insurance on your notice pay. It cannot be included inside the £30,000 tax-free exemption.

Can I negotiate a higher settlement amount?

Yes. Most opening settlement offers have room to move. Employers often increase their initial offer when you show objective statutory entitlements or point out procedural defects. A specialist solicitor can conduct these negotiations for you.

Who pays the solicitor legal fees for reviewing my agreement?

Your employer covers the legal fees for an independent solicitor to review your settlement agreement. This legal contribution usually ranges between £350 and £750 plus VAT. Your solicitor invoices your employer directly, so you pay nothing.