Settlement Agreement Calculator

A settlement agreement, formerly called a compromise agreement, is a legally binding contract in which an employee waives the right to bring tribunal claims in exchange for a financial package. Typical components include notice pay, redundancy pay, an ex-gratia payment that is often tax-free up to £30,000, holiday pay and a contribution toward legal fees. For the waiver to be valid the agreement has to be in writing, signed, and taken only after you have received independent legal advice, which is why employers usually pay towards your solicitor's bill, often £500 to £1,500 plus VAT.

Employers reach for one in several situations: a redundancy they want to settle on enhanced terms, a performance problem they would rather not run through a formal process, an active dispute, or a mutual parting of the ways. What the package is worth then depends on your bargaining position. Strong tribunal claims, such as unfair dismissal or discrimination, give the employer more reason to be generous, and a common opening reference point in negotiation is the basic award plus 3 to 6 months' salary, though the actual range is enormous.

There is no formula behind the figures, only negotiation, and the variables are your length of service, salary, the strength of any claim, your age and how easily you are likely to find another role. In practice an amicable departure tends to settle at 1 to 3 months' salary, a performance-related exit at 3 to 6 months, and a discrimination claim at 6 to 12 months or more, plus an award for injury to feelings under the Vento bands, which run from £1,300 to £62,900 and above. The sensible anchor is what a tribunal might award if you won, discounted for risk and set against the cost and uncertainty of litigating for the employer.

This calculator adds up statutory redundancy, notice pay, holiday pay, any bonus owed and the ex-gratia sum you have been offered, then shows how the package is taxed. The first £30,000 of redundancy and ex-gratia pay is normally free of income tax under sections 401 to 403 of the Income Tax (Earnings and Pensions) Act 2003, and anything above £30k is taxed at your marginal rate. Employees never pay NI on it; since 6 April 2020 the employer pays Class 1A NI on the excess over £30,000. Pay in lieu of notice is always taxable, accrued holiday pay is taxable, and any sum paid for a restrictive covenant is taxed separately, so how the agreement is drafted directly changes what you keep.

Five mistakes account for most of the money left behind. Signing without independent legal advice makes the agreement invalid in the first place. Accepting the opening offer is the expensive one, since initial offers are often 30% to 50% of what an employer would eventually pay if pushed. Settling without testing the merits of a tribunal claim can be worse still, because discrimination awards are uncapped and frequently exceed the offer on the table. Bonuses due pro rata, share options and the wording of a reference all need to be written into the agreement rather than assumed. Confidentiality terms and restrictive covenants deserve a proper read too, as some are unenforceable in the form the employer proposes.