Settlement agreement tax: how the £30,000 threshold applies to redundancy and exit payments in 2026

Key Takeaways

1. The £30,000 tax-free threshold for settlement payments applies in 2026 UK redundancy and exit deals, covering most statutory and ex gratia payments made on termination of employment.
2. Any redundancy or settlement payment over £30,000 will be taxed under PAYE, and your employer must also pay Class 1A National Insurance Contributions on the excess.
3. Payments like payment in lieu of notice (PILON), accrued holiday, and bonuses are fully taxable and do not benefit from the tax-free element.
4. Only one £30,000 tax-free allowance applies per employment, so previous settlements with the same employer could reduce your available exemption.
5. Our solicitors provide expert settlement agreement tax advice UK-wide, helping you structure your agreement to maximise your tax-free amount and avoid HMRC challenges.
6. Signing a settlement agreement waives your rights to claim unfair dismissal or discrimination, which is why the s.203 Employment Rights Act 1996 requires independent legal advice.
7. Our service is SRA regulated, rated Excellent with over 1,400 five-star reviews on Trustpilot and Google, and is free to you as your employer pays the legal fees.
8. Book a same-day remote appointment with our solicitors to review your redundancy offer, improve your financial outcome, and receive your adviser’s certificate for signing.

Settlement agreement tax: how the £30,000 threshold applies to redundancy and exit payments in 2026

If you are reviewing a settlement agreement after redundancy or a negotiated exit in 2026, you need to know how the £30,000 tax-free threshold for settlement payments applies in 2026 UK redundancy and exit deals. The law requires you to get independent legal advice before signing—without it, your agreement cannot be enforced, and your employer will usually cover the full cost so the advice is free for you.

The stakes are high: signing a settlement agreement waives your right to bring claims for unfair dismissal or discrimination. It is essential to ensure any payment offered is not only fair but structured to maximise your tax-free allowance. Our solicitors offer expert guidance and can help you avoid costly tax pitfalls—at no charge to you—as part of the mandatory legal process.

This article explains which parts of your settlement or redundancy package qualify for the £30,000 exemption, which payments are fully taxable, and how our solicitors help you structure your exit agreement for maximum benefit. For clear, confidential advice, call us on 0800 054 1144 or book your settlement agreement advice online.

Is my settlement agreement tax free in 2026? Understanding the £30,000 threshold for redundancy and exit pay

Whether your settlement agreement is tax free in 2026 depends on both the nature and amount of your termination payments, as well as the structure of your deal. As at present, the first £30,000 of qualifying termination payments—such as statutory redundancy, certain ex-gratia sums, and compensation for loss of office—can be paid free of tax and National Insurance Contributions (NICs). This £30,000 tax-free exemption is set by sections 401–403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and is not due to change for 2026. It is crucial to carefully separate genuinely exempt sums from routine earnings, PILON, or benefits, as HMRC will tax types of payments differently.

If your total payments exceed £30,000, the excess is subject to income tax, and employer Class 1A NIC may also be payable. For the exemption to apply, you must not have received earlier tax-free payments from the same employer (or group) for loss of office within the relevant period. Moreover, eligible elements are defined strictly: payments for work done, contractual notice (via PILON), holiday pay, and bonuses are always taxable.

What is the £30,000 tax-free exemption for settlement and redundancy payments?

The £30,000 tax-free exemption allows employees to receive up to £30,000 of certain qualifying payments, associated with the end of employment, free of income tax and NICs. This covers statutory redundancy, most ex-gratia payments for loss of employment, and compensation for contractual breaches—but never routine earnings. The detailed statutory basis is found at ITEPA 2003, sections 401–403, which sets the £30,000 threshold and outlines what qualifies as a termination payment.

This rule applies across almost all standard settlement agreements, redundancy exits, and mutual departures, provided that payments are genuinely compensatory and not for services performed, accrued rights or contractual entitlements. Settlement payments exceeding £30,000 are taxed under PAYE, and Class 1A NICs must be paid by the employer on the excess, not by you.

Which types of payments can qualify for the tax-free threshold?

Qualifying payments for the £30,000 exemption typically include statutory redundancy pay, most non-contractual or “ex-gratia” sums paid as compensation for loss of office, and settlement amounts for discrimination or whistleblowing claims where no employment income or notice is being replaced. These are not taxable provided they are not “earnings” under ITEPA 2003 nor salary already due.

Key examples:

• Statutory redundancy pay (as required by law)
• Enhanced (non-contractual) redundancy pay
• Payments to settle claims for unfair dismissal, discrimination (Equality Act 2010), or protected disclosures (whistleblowing)
• Genuine ex-gratia (compensation) sums above statutory minima
• Compensation for breach of contract (excluding sums earmarked as notice)

However, to ensure protection under the exemption, each element must be defensibly documented and not a disguised payment for services, bonuses, or accrued entitlements.

If your total payments exceed £30,000, the excess is subject to income tax, and employer Class 1A NIC may also be payable. For the exemption to apply, you must not have received earlier tax-free payments from the same employer (or group) for loss of office within the relevant period. Moreover, eligible elements are defined strictly: payments for work done, contractual notice (via PILON), holiday pay, and bonuses are always taxable.

What are taxable payments: PILON, holiday, bonuses, and benefits?

Certain sums in settlement agreements are always subject to tax and NICs. These include:

• Payments in lieu of notice (PILON), whether contractual or not, now subject to the post-2018 Post-Employment Notice Pay (PENP) rules in ITEPA 2003 sections 402B–402E
• Accrued but untaken holiday pay
• Unpaid salary, commissions, and bonuses due for work already done
• Non-cash benefits (e.g. employer cars, shares, gym memberships)

These are all “earnings” for tax and NIC purposes, and do not qualify for any part of the £30,000 exemption. Employers must deduct PAYE and employee NICs in the final payroll. As a practical matter, your settlement agreement schedule should set out these sums separately.

Why does the law require independent legal advice for a settlement agreement? (s.203 Employment Rights Act 1996 explained)

The law requires that every employee signing a settlement agreement must first receive independent legal advice, under section 203 Employment Rights Act 1996. This protects your rights: you can only lawfully waive claims such as unfair dismissal, redundancy pay, discrimination, whistleblowing, or breach of contract if you have received qualified, independent advice. Without it, an agreement is not legally binding on statutory claims, and your employer has no certainty.

Your solicitor must be on the SRA roll or another approved adviser, independent of your employer. Our solicitors will review all the terms, explain consequences, check the package is fair, and issue an ILA certificate confirming to your employer that you have had the required advice. The employer pays all legal fees for this process, and we cap our invoice to the standard contribution.

What rights do you waive by signing?

By signing a settlement agreement, you typically waive your rights to bring a claim in an employment tribunal or court for issues arising from your employment or its termination. This usually includes rights to claim for:

• Unfair dismissal (s.94 ERA 1996)
• Redundancy pay (statutory or enhanced)
• Discrimination (Equality Act 2010)
• Unpaid wages, holiday pay, bonuses, commission
• Breach of contract, constructive dismissal, or wrongful dismissal
• Rights under TUPE on business transfer
• Whistleblowing (Employment Rights Act s.43C)

A properly drafted agreement should list all relevant statutes and claims it settles. You cannot, however, lawfully waive rights to accrued pension, personal injury unknown at the time, or to take action if the employer breaches the agreement itself.

How to secure the adviser’s certificate for your employer

Securing the legal adviser’s certificate is a vital final step. After reviewing the settlement agreement and advising you, our solicitor signs and issues a certificate addressed to the employer, confirming:

1. The statutory requirements for a binding waiver of claims under section 203 ERA 1996 were satisfied;
2. The advice given was independent and covered all claims in the agreement;
3. Our solicitors hold adequate professional indemnity insurance, as required by law.

The employer will only release payment after receiving this certificate. Remote and same-day processes mean you can receive the adviser’s certificate by email, so there’s no delay.

How is my financial package calculated and is it fair?

Financial packages in settlement agreements are a mixture of statutory and negotiable elements. You start with any sums you are legally entitled to—outstanding salary, accrued holiday, and statutory redundancy pay. On top, the employer may offer an enhanced redundancy payment, an ex-gratia sum, or an additional amount to settle claims such as unfair dismissal, discrimination, or whistleblowing. Fairness is assessed by reference to your legal rights, earning potential, length of service, and the strength of any claims.

Our solicitors will always compare your package against statutory entitlements, your contract, and compensation levels you could win at tribunal. Tools such as our Settlement Agreement Calculator or Employment Tribunal Compensation Estimator help you sanity-check the offer and support negotiations.

Statutory redundancy pay rates and caps for 2026

Statutory redundancy pay is set by law and capped, with annual reviews. For 2026, anticipated rates (subject to government confirmation) are:

• One and a half week’s pay for each full year over age 41
• One week’s pay for each full year between ages 22 and 41
• Half a week’s pay for each full year under 22

Weekly pay is capped (in 2025/26 likely around £700–£750) and only up to 20 years’ continuous service count. Use the official Redundancy Calculator or gov.uk redundancy pay checker for the precise sum.

Simple checklist:

1. Confirm your continuous service—start and end dates.
2. Determine your weekly pay (before tax, up to the relevant cap).
3. Apply the age/service formula above.
4. Cap the total at 20 years.

All statutory redundancy payments qualify for the £30,000 exemption.

Enhanced redundancy, ex-gratia, and compensation for unfair dismissal or discrimination

Enhanced redundancy arises when the employer voluntarily offers more than the statutory minimum, often to manage risk, preserve reputation, or quickly resolve potential claims. Ex-gratia sums are “voluntary” payments in excess of contractual/regulatory minima, and can reflect risks of unfair dismissal, discrimination (Equality Act 2010), or whistleblowing.

These additional payments—provided they are not contractual or disguised notice/salary—also usually fall within the £30,000 tax-free limit. For discrimination or whistleblowing, there’s no statutory cap, and you can negotiate higher sums, which are tax-free only up to the £30,000 aggregate.

Our solicitors will benchmark offers against tribunal compensation for your situation. For certain claims, the Discrimination Compensation Calculator is invaluable.

If you want an expert to break down your financial package, maximise tax-free sums, or negotiate a fair exit, call our settlement agreement solicitors on 0800 054 1144 or book your settlement agreement advice online. Our advice is entirely free to employees, as the employer pays our capped fee.

Settlement agreement tax rules in the UK for 2026: what counts towards the £30,000 exemption?

Settlement agreements in 2026 will still follow UK law—primarily ITEPA 2003, sections 401–403—allowing qualifying redundancy or ex-gratia payments up to £30,000 to be paid tax free. This “exemption bucket” covers only termination payments, not accrued contractual entitlements or post-employment payments for services. If the sum offered is close to or above £30,000, care is needed: only non-contractual, compensatory sums go into the tax-free allowance.

Payments are strictly policed by HMRC to detect attempts to reclassify salary, PILON, or benefits as tax-free. The law requires all post-April 2018 settlements to calculate and deduct tax on any Post-Employment Notice Pay (PENP) before calculating what, if any, is left for the exemption. In settlement agreements, each payment type must be itemised and explained, especially where discrimination, whistleblowing, or injury to feelings is referenced.

How does Post-Employment Notice Pay (PENP) impact my tax-free amount?

PENP—the amount that must be taxed as “earnings” if your notice is not fully worked—is the biggest variable affecting the £30,000 exemption. Under ITEPA 2003 sections 402B–402E, if your employer pays notice in lieu (contractual or not), you must be taxed on the value of notice pay you would have received had you worked your full notice. Only sums above this, plus earnings, can go into the exemption.

PENP calculation can be complex and is often misapplied. It considers your basic salary, contractual notice, and termination date. The resulting taxable amount is usually the greater of contractual notice period (not worked) or statutory minimum notice.

If my total settlement exceeds £30,000: what tax and NIC is due?

If your aggregate qualifying termination payments exceed £30,000, the first £30,000 remains exempt from tax under ITEPA 2003, while any amount over this is subject to PAYE income tax at your marginal rate. Since April 2020, Class 1A National Insurance Contributions (NIC) at the employer rate (currently 13.8%) are due on any payment above the £30,000 threshold, but employees do not pay employee NIC on this excess.

For non-tax-exempt sums (PILON, holiday pay, bonus), both PAYE tax and employee NIC are due as if those sums were regular earnings. Accurate, split documentation in your agreement protects both you and your employer in event of HMRC audit.

How does tax and National Insurance work on different types of termination payments?

Each payment in your exit package falls into a different tax category, determined by law. Here’s a quick breakdown:

Each employer-drafted agreement should have a clear “schedule of payments” to help you, us, and HMRC identify how much is genuinely tax free.

How to structure a settlement agreement to maximise the tax-free element

Maximising your tax-free settlement amount relies on careful legal drafting, clear documentation, and avoiding any blend of contractual earnings into compensatory sums. The schedule of payments must break down each element, ensuring only statutory redundancy, genuine ex-gratia, and compensatory sums are assigned to the £30,000 exemption. PENP and other earnings are captured first, with the “remainder” going tax free, up to the limit.

Employers and employees can lawfully agree how best to structure the breakup (for example, apportioning more to redundancy if the statutory formula supports it), but employment law and HMRC guidance prohibit “disguised earnings”. Additional sums for discrimination or injury to feelings (if proven) can also qualify.

Numbered steps to safeguard your tax-free amount:

1. Identify all contractual payments due (salary, holiday, PILON)
2. Calculate PENP under the statutory formula
3. Allocate the first £30,000 above PENP and earnings to redundancy, ex gratia, compensation, or discrimination elements
4. If total exceeds £30,000, agree and document how any excess is treated for tax

Can previous payments affect my £30,000 tax-free cap?

Yes, previous tax-free termination payments made to you by the same employer (or associated employers within a group) for a related loss of employment are aggregated for the purposes of the £30,000 exemption. If you had a prior redundancy or settlement agreement, any tax-free amount already used up counts towards your cap for future deals.

HMRC strictly polices these rules; double-dipping the exemption is not permitted, even if employment was interrupted and restarted.

Should you consider pension contributions or other arrangements?

Pension contributions are sometimes used to optimise the tax position in settlement agreements. Employers may pay part of the taxable termination sum directly into your pension scheme. If done compliantly, these contributions might escape immediate income tax (subject to annual and lifetime allowance rules) and can be efficient if your pension has headroom for additional contributions.

Careful legal drafting is required to avoid an “unauthorised payment” for pension tax purposes, and not all employers will agree to this. You cannot transfer the tax-free £30,000 directly into your pension as a lump sum from the employer—such contributions must be from the taxable part.

HMRC scrutiny: avoiding common pitfalls and documentation errors

HMRC routinely audits settlement agreements to confirm that payments above and below the £30,000 threshold are genuinely qualifying, and not attempts to avoid PAYE. Key pitfalls include:

• Mis-labelling PILON or holiday pay as compensation
• Understating notice periods to inflate the tax-free sum
• Failing to document discrimination or whistleblowing reasons for ex gratia payments above standard redundancy
• “Backdating” settlement agreements or staggered payments

Accurate schedules, unambiguous clauses, and professional legal review are vital. Our solicitors cross-check tax treatment and defend you if HMRC queries arise later.

To secure your position, optimise your agreement, and avoid HMRC penalties, call our settlement agreement solicitors on 0800 054 1144 or book your settlement agreement advice online. Your employer always pays our capped fee, so this expert legal advice is free for employees.

Key clauses and legal risks in a 2026 settlement agreement: what to check before signing

Before signing, you must review more than just the payment sums. Key clauses in 2026 settlement agreements can affect your post-employment options, tax position, and your risk if HMRC challenge a payment. Top clauses to check include:

• The schedule of payments, itemising tax-free and taxable elements
• Tax indemnity, allocating who bears risk if HMRC challenge the tax status
• Restrictive covenants limiting your future employment
• Confidentiality clauses and the terms of reference
• A warranty that you have not already found other employment or breached your contract

Our solicitors examine every draft clause for hidden traps, inequalities, or unenforceable provisions. Where terms are unfair, ambiguous, or risk hidden liability, we negotiate changes and document all agreed clauses in the ILA process.

Restrictive covenants and non-compete clauses

Many agreements include restrictive covenants limiting you from working for competitors, poaching staff, or soliciting clients after leaving. Often, these repeat or extend terms in your original contract of employment. Where new restraints are proposed or durations extended, they may affect your next job opportunity and could be legally unenforceable if too broad.

Our solicitors check that any restrictions are necessary, proportionate, and mirror your pre-existing contract wherever possible. We advise and negotiate on reduction or waiver if your future employment will otherwise be unreasonably hindered.

Confidentiality, NDA provisions, and reference wording

Confidentiality and NDA clauses are routine, requiring you not to disclose settlement terms or (sometimes) the circumstances leading to your exit. A good agreement should also provide you with a reference—ideally with agreed, objective wording annexed as a schedule.

Always check:

• That “gagging” provisions don’t prevent you reporting discrimination or wrongdoing (whistleblowing claims cannot be lawfully silenced)
• The agreed reference wording reflects your role and service positively

Our solicitors draft and negotiate clear reference schedules, ensuring your future prospects are protected.

Tax indemnities: who is liable for HMRC claims?

Most settlement agreements shift HMRC risk with a “tax indemnity” clause requiring you, as employee, to reimburse your employer if HMRC later conclude that more tax/NIC was due. However, this indemnity can be drafted too widely, putting you at risk for mistakes by the employer or their payroll.

We ensure indemnities are properly limited to sums recoverable solely due to your actions or misstatements—not errors outside your control. We always negotiate clauses making the employer responsible for disputed payroll or calculation errors.

Settlement agreement signing process: step by step (remote and same-day options)

The signing process for a 2026 settlement agreement is quick and entirely remote for most employees. Our SRA-regulated solicitors handle the process with speed and clarity:

1. You contact us and share your draft settlement agreement, schedule of payments, and any correspondence from your employer.
2. We schedule a telephone or video call (same day if urgent) to discuss your exit, payments, and clarify your goals or questions.
3. Our solicitors review every clause, negotiate changes with your employer’s solicitors if needed, and check calculations for tax and fairness.
4. Once you’re satisfied and ready, we guide you through the e-signature process (no need for physical meetings).
5. After you sign, our solicitor issues the required ILA certificate to your employer—allowing immediate processing of funds.

Everything is tracked, transparent, and stress-free for you.

Booking independent legal advice

Booking advice is faster than many employees realise. You can use our book your settlement agreement advice online system any time, or call 0800 054 1144 to directly discuss your needs with a specialist. We arrange convenient telephone or video appointments—lunchtime, evenings, or weekends if urgent.

Booking at the earliest hint of a settlement or redundancy offer provides you with maximum leverage. Early advice lets you avoid errors, strengthen negotiation, and avoid accidentally breaching restrictive terms.

Reviewing, negotiating, and signing your agreement

The strength of a good settlement agreement rests on clear and fair negotiation. Our solicitors will examine whether the package reflects your legal rights, challenge harsh or one-sided terms, and push for references, broader positive wording, or higher sums where justified by your specific situation (e.g. potential discrimination or whistleblowing claims).

The review process is collaborative: we compare your entitlements, listen to your career goals, and prepare you for any likely pushback. When all points are agreed, e-signature and certification are completed rapidly—often within hours.

Why Choose Settlement Agreement Lawyers?

Choosing the right legal advisers for your settlement agreement can mean the difference between a swift, amicable exit and expensive disappointment. Our focus is on clarity, speed, and maximising your net payment—especially when it comes to applying the £30,000 tax-free threshold in settlement agreements and redundancy cases.

We only act for employees, giving you the confidence that your interests—not the employer’s—come first. Our practical, transparent approach avoids jargon and delays. Read our client success stories for proof of results.

Service is free to you (employer pays, fee capped)

Your employer covers the cost of the legal advice required for settlement agreements—your advice from our solicitors is free to you, and our fees are capped to the employer contribution. You never pay out of settlement funds, and we’ll never surprise you with hidden costs.

If your employer’s contribution is below the usual cap, we routinely negotiate an uplift to ensure you get all the required advice with no shortfall.

Same-day, remote expert advice UK-wide

Our solicitors use secure telephone and video appointments—no office visits required. Documents and advice can be reviewed from your phone, tablet, or computer. Where settlements are urgent, we provide a full review, negotiation, and certificate on the same day.

We serve clients in every sector, every region, and any employment context: redundancy, performance exit, mutual resignation, discrimination, and protected disclosures.

SRA regulated specialist solicitors

We are fully regulated by the Solicitors Regulation Authority (SRA), meaning all advice, handling, and documentation is compliant, insured, and subject to rigorous professional standards. Our compensation insurance protects you, and our remote service is just as effective—and safe—as an in-person consultation.

You can read more about our approach on our Settlement Agreement Advice and Free for employees / funding pages.

Negotiation experts rated Excellent on Trustpilot and Google

Our negotiation strength and client satisfaction are reflected in our independent client ratings on Trustpilot and Google. We achieve rapid, positive outcomes—higher payouts, better references, and clearer tax positions—by robustly challenging unfair employer offers and ambiguous tax schedules.

We proactively negotiate when there’s scope to improve your terms: higher ex-gratia, explicit references, limited restrictive covenants, or enhanced payment schedules. Each negotiation is private, client-focused, and at no cost to you.

Frequently Asked Questions About the £30,000 Settlement Agreement Tax-Free Threshold

Is redundancy pay tax-free in 2026, and how does the £30,000 exemption work?

Yes, statutory redundancy payments remain tax-free up to £30,000 in 2026. This exemption, set by ITEPA 2003, applies to the combined total of qualifying redundancy and genuine ex-gratia sums—amounts above £30,000 are taxed.

What counts towards the £30,000 settlement agreement cap?

All qualifying termination payments—statutory redundancy, enhanced redundancy, genuine ex-gratia, and certain discrimination compensations—can count. PILON, holiday pay, and bonuses are excluded and always taxable.

Is PILON included in the £30,000 tax-free amount?

No, PILON and any post-employment notice pay (PENP) are fully taxable as employment income and must be taxed before applying the £30,000 exemption to genuine compensation sums.

Can I receive multiple tax-free payments from the same employer?

No, HMRC aggregation rules mean only £30,000 is exempt per employment, regardless of how many agreements or exits; earlier tax-free sums must be aggregated with any later settlement.

Do enhanced redundancy or ex-gratia payments qualify for the exemption?

Yes, both enhanced redundancy and ex-gratia payments count towards the £30,000 cap, as long as they are not contractual or disguised earnings. The statutory and voluntary sums total together before taxation is applied above £30,000.

What if I have taken part of my settlement as a pension contribution?

Employer pension contributions (from the taxable portion) may provide tax efficiency if made within HMRC annual/lifetime limits, but cannot directly use the £30,000 exemption. Seek advice before arranging this.

Are non-cash benefits (like shares or a car) covered by the exemption?

No, non-cash benefits are assigned a cash value and taxed as earnings at source, and do not qualify for the £30,000 exemption—they must be dealt with in your P45/final payroll.

What legal risks or HMRC challenges should I watch out for?

HMRC will challenge any misclassification of taxable earnings (like PILON or bonuses) as compensation, or failure to account for aggregated prior settlements. Ambiguous schedules or unlawful tax clauses can create back tax liabilities and penalties.

Book Your 2026 Settlement Agreement Tax Advice — Maximise Your £30,000 Exemption