Being handed a settlement agreement is one of those moments where you really wish you'd paid more attention in that employment law module you never took. Don't worry. We'll walk you through it.

There's no magic formula, but most settlement agreements in a redundancy situation land somewhere between two and six months' salary (before tax) on top of your statutory redundancy pay. Some are higher. Some are lower. It depends entirely on your situation and how much leverage you have.

If your employer has put a settlement agreement in front of you, that's actually good news. It means they want this to go away cleanly. And that means there's room to negotiate.

What's normally in a settlement agreement

A settlement agreement is a legal contract. You agree to give up your right to bring claims against your employer (like unfair dismissal) in exchange for a financial package.

A typical agreement includes:

Statutory redundancy pay. This is the legal minimum based on your age, service, and weekly pay. You're owed this regardless of the agreement. It's always tax-free.

An extra goodwill payment. Sometimes called an "ex-gratia payment." This is the extra money on top of your statutory redundancy pay. It's the main thing you're negotiating. Combined with your statutory pay, the first £30,000 of the total is tax-free under ITEPA 2003, s.403.

Notice pay. Either you work your notice, get garden leave (where you stay employed and get paid but don't come in), or get paid off instead of working it (called PILON, which stands for "pay in lieu of notice"). PILON is taxed as normal earnings. It doesn't count towards your £30,000 tax-free allowance.

Holiday pay. Any holiday you've built up but haven't taken must be paid out. Also taxed as earnings.

Agreed reference. The wording your employer will give to future employers. This should be attached to the agreement, not left as a verbal promise.

Confidentiality clause. Usually says you can't tell people the terms. Try to make sure this is mutual so your employer can't talk about it either.

Giving up your right to make claims. The agreement will list all the legal claims you're signing away, like unfair dismissal and discrimination. This is the whole point of the agreement from your employer's perspective.

How to work out what's fair

There's no calculator for this because every situation is different. But there are some benchmarks.

If the process was clean and your employer did everything by the book, a settlement of one to two months' salary on top of statutory is common. Your employer is basically paying for a clean exit and certainty.

If there were process failures, the number goes up. Skipped consultation, unfair selection criteria, no alternative roles offered. Each failure strengthens your position. Two to four months' salary on top of statutory is typical here.

If there were serious failures or protected characteristics are involved, you're looking at four to six months' salary or more. If your employer selected you for redundancy while you were pregnant, on maternity leave, or shortly after raising a grievance, they have a serious legal problem. They know it, and the settlement should reflect it.

If you have a strong unfair dismissal claim, think about what your employer stands to lose. A tribunal can award up to 52 weeks' pay or £115,115 (whichever is lower) in compensation, plus a basic award on top. Then add their legal costs of £10,000 to £30,000 to defend the case, plus all the management time involved. That's the number in their head when they're deciding how much to offer you.

The £30,000 tax-free threshold

This is important because it affects how much you actually take home.

The first £30,000 of termination payments is tax-free. This covers your statutory redundancy pay plus any extra goodwill payment combined.

Anything above £30,000 gets taxed at your normal rate.

Notice pay and holiday pay are always taxed as earnings and sit outside the £30,000 allowance. So if your agreement bundles everything into one number, make sure you know how it breaks down. The way the payments are categorised affects your tax bill.

A good solicitor will check this. So will our settlement agreement review tool.

What to check before you sign

The money. Does the total match what you've been told verbally? Is the breakdown clear? Do you know which bits are tax-free and which aren't?

The reference. Is specific wording attached? Who will give it? Is there a clause stopping your employer from saying something different to what's written down?

Non-compete and non-solicitation clauses. Does the agreement keep in place any restrictions on where you can work or which clients you can contact after you leave? If so, can you get them removed or shortened? This is the best time to negotiate this because you have leverage.

The claims you're waiving. Read the list. It will be long. That's normal. But make sure you understand what you're giving up. If you think you have a discrimination claim, think carefully about whether the money on offer reflects that.

The deadline. Your employer will probably give you a deadline to sign. Acas recommends a minimum of 10 calendar days. If you need more time, ask. Most employers will agree.

Legal advice. The agreement isn't legally valid unless you've had independent advice from a solicitor (ERA 1996, s.203). Your employer pays for this. The typical employer contribution is £250 to £500 plus VAT. If your situation is complicated, tell the solicitor upfront and ask whether the employer's contribution will cover it.

Common mistakes

Accepting the first offer. Employers expect you to negotiate. The first number has room built in. If you accept immediately, you've left money on the table.

Focusing only on the lump sum. The reference, non-compete removal, garden leave, career support. These all have real value. Sometimes they're worth more than an extra few thousand in cash.

Not understanding the tax. If your employer structures the payments badly, you could pay thousands more in tax than you need to. Make sure the breakdown is right.

Signing under pressure. "We need this back by Friday" is not a legal requirement. Take your time. Get advice. If the offer is fair, it'll still be fair next week.

Not reading what you're signing away. You're giving up your right to bring claims. That includes unfair dismissal, discrimination, equal pay, whistleblowing. Make sure the money reflects what you're giving up.

The bottom line

A settlement agreement is a negotiation, not a take-it-or-leave-it. Your employer wants certainty. You want fair compensation. There's usually a number in the middle that works for both sides.

Work out your statutory entitlement, identify any process failures, and understand what you're giving up. That tells you whether the offer is fair or whether you should push back.

And remember: a settlement agreement isn't valid unless you've had independent advice from a solicitor, and your employer pays for it. Don't skip that step.

This article is general guidance about UK redundancy rights. It's not legal advice and shouldn't be treated as a substitute for advice from a qualified employment solicitor.