Settlement Agreement

The main purpose of a settlement agreement is for the employee to agree that their role with an employer will come to an end, usually in exchange for a financial termination payment, and for the employee to also settle any potential claims that they have against their employer.

If signed, a settlement agreement will have the effect of ‘waiving’ or settling any employment claims the employee may otherwise be entitled to bring against the employer which will normally include claims such as unfair dismissal and discrimination.

An employee presented with an agreement will generally not, however, be waiving their rights in respect of claims for:

• personal injury claims for which they are currently unaware of
• accrued pension rights and
• enforcing their settlement agreement

Although in specific circumstances, this could be required.

Our Employment Department are not tax advisers and so are unable to provide any specific advice as to the tax arrangements which will apply to the payments being made to an employee. Should you need any tax advice, we would be pleased to refer you to an appropriate adviser.

However, an employee is usually entitled to receive up to £30,000 tax free as long as it is genuinely and solely compensation for the loss of their employment. This would not include any payments that are due to the employee under their contract of employment, for example, notice pay or annual leave payments.

An agreement will also often include a tax indemnity (i.e. a promise to reimburse) in favour of the employer, and our specialist team will be able to advise on whether this applies to your specific agreement and the implications of this.