Settlement agreement payment: how much will I actually receive?
A settlement agreement usually bundles several payment types into one figure. HMRC treats each component separately — and the label on your agreement does not always determine the tax treatment. What you actually receive depends on how much is taxable earnings vs qualifying termination payments within the £30,000 exemption.
Typical settlement components
| Component | Tax treatment | UC treatment (if claiming) |
|---|---|---|
| Statutory redundancy | May be tax-free within £30k combined | Capital |
| Ex-gratia / compensation | May be tax-free within £30k combined | Capital |
| PILON / notice pay | Always taxable as earnings | Earnings |
| Holiday pay | Always taxable as earnings | Earnings |
| Unpaid wages / bonus | Always taxable as earnings | Earnings |
| Employer legal fees (direct) | Usually paid to your solicitor — not your income | N/A |
The £30,000 exemption
The first £30,000 of qualifying termination payments combined is normally free of income tax and employee NI. Amounts above £30,000 are taxed at marginal rate. PENP rules may reclassify part of a payment as taxable earnings if you did not work your notice — even when labelled compensation.
Take-home estimate
To estimate what you may actually receive, enter each line from your settlement schedule separately. Do not assume the entire lump sum minus £30,000 is your take-home. PILON and holiday can significantly reduce the net figure. See how much redundancy pay take-home.
Universal Credit considerations
Qualifying settlement compensation counts as capital when received — it may affect tariff income or the £16,000 limit. PILON and holiday are earnings if paid after you claim. This is separate from tax treatment.Redundancy and Universal Credit guide.
What this means for you
- Your solicitor should explain the tax treatment of each payment — you must receive independent legal advice to sign.
- Ask for a schedule showing gross amounts, tax, NI and net for each component.
- Model the package before agreeing figures — a higher headline may not mean proportionally higher take-home.
Caveats
Settlement agreements are legally binding once signed. This guide is general tax and UC information — not legal advice on whether to accept terms. Always rely on your solicitor for the agreement itself.
Related guides
- Is redundancy pay taxable?
- PILON tax
- How much will I actually take home?
- Redundancy and Universal Credit
- Settlement agreement tax calculator
Use the Redundancy Take Home calculator
Source: GOV.UK. Last reviewed September 2026.