Settlement Agreements in England, Wales and Scotland

Who this guide is for

Employees in England, Wales or Scotland who have been offered a settlement agreement, or are negotiating one, and want to know what it means, what makes it binding and how the money is taxed.

What this guide does not cover

• Work in Northern Ireland: see the Northern Ireland guide.
• Whether the amount you have been offered is fair. That depends on the claims you would give up, and advising you on it is the independent adviser's job.
• Whether you have a claim in the first place: use the employee rights checker.
• Which claims a settlement agreement cannot settle, pensions, and agreed references in detail. This guide does not cover these: ask your adviser or Acas.
• Tribunal time limits in detail: use the tribunal deadline checker.

The questions that decide the answer

1. Has your employment ended, or when will it end? The date of the act you would complain about starts the tribunal time limit, and settlement talks do not stop it.
2. Is there already a dispute or a claim? This decides how the talks are protected, and whether an Acas COT3 is an option.
3. Which claims would you be giving up? The agreement must name them. Your adviser must explain what you would lose.
4. What is the money made up of? Notice pay, earned pay and compensation for losing your job are taxed differently.

"What is a settlement agreement?"

A settlement agreement is a legally binding contract. Its main feature is that you waive your right to make a claim to a court or employment tribunal on the matters that are specifically covered in the agreement. It usually includes a payment, and may include a reference. Settlement agreements used to be called compromise agreements.

They are voluntary. You do not have to sign one.

"What makes it legally binding?"

For a settlement agreement to be legally valid, all of these conditions must be met:

• It must be in writing.
• It must relate to a particular complaint or proceedings. Simply saying it is in "full and final settlement of all claims" is not enough: it must specifically state the claims it covers.
• You must have received advice from a relevant independent adviser on the terms and effect of the agreement, and its effect on your ability to pursue those claims before an employment tribunal.
• The adviser must be insured, in case you suffer a loss because of their advice.
• The agreement must name the adviser.
• The agreement must state that the legal conditions for settlement agreements are met.

"Who can advise me, and who pays?"

The independent adviser can be a qualified lawyer, a certified and authorised trade union officer, official, employee or member, or a certified and authorised advice centre worker. They must not be employed by, or acting for, your employer.

Your employer should consider offering to pay for the advice, but does not have to.

"How long do I get to decide?"

Your employer should give you a reasonable amount of time to consider the written offer and get independent advice. What is reasonable depends on the situation. The Acas Code of Practice on settlement agreements recommends allowing at least 10 days.

"Can what we said be used against me, or by me?"

Settlement discussions usually cannot be used as evidence in an employment tribunal or another court, because of the "without prejudice" principle and section 111A of the Employment Rights Act 1996.

"Without prejudice" needs an existing dispute and a genuine attempt to settle it, and can apply to any type of claim.

Section 111A lets an employer offer a settlement agreement in confidence even where there is no existing dispute. It only applies to unfair dismissal and constructive dismissal claims. It does not cover automatically unfair dismissal, such as for whistleblowing, or claims such as discrimination, breach of contract or wrongful dismissal.

If there has been improper behaviour, the discussions could be used as evidence. Improper behaviour includes harassment, bullying and intimidation, victimisation, discrimination, and putting undue pressure on you, for example not allowing a reasonable time to consider the offer, or telling you before a disciplinary procedure that you will be dismissed if you turn the offer down.

Being offered a settlement agreement to end your employment is not by itself something you can use to claim constructive dismissal.

"How much of it is taxed?"

You do not usually pay tax on the first combined £30,000 of statutory redundancy pay, additional severance or enhanced redundancy pay, and non-cash benefits such as company property you keep. You pay tax on any amount over a combined total of £30,000.

If you do not work your full notice period, you pay tax and National Insurance on the part of your termination payment equal to what you would have earned if you had worked it. This can include a payment in lieu of notice (PILON), pay during gardening leave, and part of any severance pay, known as post-employment notice pay (PENP). Your employer works out the PENP. It does not apply to statutory redundancy pay.

Wages and holiday pay you have already earned are taxed as normal.

You do not pay tax or National Insurance on legal costs your employer pays directly to your solicitor as part of the settlement.

"What about a confidentiality clause?"

Your employer cannot use a confidentiality clause to stop you whistleblowing, reporting a crime to the police, or, in England or Wales, sharing information about a crime to get advice and support if you are a victim of crime.

Since 6 April 2026, sexual harassment is a qualifying disclosure under whistleblowing law.

Further restrictions on confidentiality clauses about harassment and discrimination under the Employment Rights Act 2025 are not in force yet.

"We're already in early conciliation or at tribunal"

A COT3 is a legally binding settlement agreement reached through Acas early conciliation. Unlike a settlement agreement signed with a solicitor, a COT3 does not need independent legal advice to be binding.

Deadlines you must meet

• Most tribunal claims, including unfair dismissal: 3 months less 1 day from the act you are complaining about, or 6 months less 1 day where that act (or the last act in a series) happened on or after 1 October 2026.
• Negotiating a settlement does not pause this. Notify Acas within your time limit, so that the clock is paused while early conciliation runs.
• Your exact date depends on your facts: the tribunal deadline checker works it out.

Traps

• An agreement without a named, insured, relevant independent adviser does not stop you making a tribunal claim on those statutory rights.
• The £30,000 is not tax free on everything. Notice pay, pay during gardening leave and pay already earned are taxed.
• The 10 days is the Acas Code's recommendation, not a fixed legal deadline.
• Your employer does not have to pay for your advice.
• Settlement talks do not stop the tribunal clock.
• Do not use Northern Ireland rules here.