If you’ve been offered a settlement agreement in the UK (formerly a compromise agreement) — or you’re an employer preparing one — the stakes are high. The right approach can mean certainty, closure, and a clean exit; the wrong approach can lead to tax surprises, unenforceable clauses, or future disputes.

This guide explains how to negotiate a fair settlement agreement in the UK, with negotiation strategies, realistic numbers, template wording, common traps, and references to current UK law and guidance.

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Quick takeaways (for both sides)

Independent legal advice is mandatory for the employee before the agreement is valid. The agreement must identify the adviser and confirm the statutory conditions are met. Legislation.gov.uk to learn about fair settlement agreement in the UK
Give time to consider: ACAS says a minimum of 10 calendar days is generally reasonable to review terms and take advice. Acas
Protected conversations (s.111A ERA 1996) allow off-the-record negotiations about exit — but do not shield discrimination or whistleblowing issues. Legislation.gov.uk+1
Tax matters: payments for notice (PILON/PENP) are taxable as earnings; parts of genuine termination compensation may fall under the £30,000 exemption (but watch the rules). GOV.UK
Injury to feelings = uncapped in discrimination; Vento bands updated from 6 April 2025 guide the level: £1,200–£60,700+ depending on seriousness. Courts and Tribunals Judiciary
Unfair dismissal cap (2025/26): lower of one year’s pay or £118,223; week’s pay cap £719 (affects redundancy/basic award). DLA Piper GENIE+1

1) Understand the legal framework before you negotiate

The validity checklist (why it matters)

For a settlement agreement to validly waive tribunal claims, it must meet statutory conditions (e.g., in writing, relate to particular complaints, employee has independent legal advice from a relevant adviser whose advice is insured, adviser is identified, and the agreement states the statutory conditions are satisfied). Legislation.gov.uk fair settlement agreement in the UK

Primary legislation: Employment Rights Act 1996, s.203 (independent advice conditions). Legislation.gov.uk
ACAS Code of Practice on Settlement Agreements (s.111A ERA) – sets expectations on process and conduct. Acas

“Protected conversations” vs “without prejudice”

s.111A ERA 1996: protects pre-termination negotiations in ordinary unfair dismissal claims — but not in discrimination or whistleblowing claims. Legislation.gov.uk
Without prejudice: requires a genuine dispute. In BNP Paribas v Mezzotero [2004], protection failed because there was no existing dispute at the time; what was said could be used in evidence. This is a cautionary tale for employers starting an exit chat too early. CaseMine

Practical upshot: keep proposals professional, avoid pressure, and assume what you say might be disclosable if the protections don’t apply.

COT3 vs Settlement Agreement — which route?

COT3 (via ACAS) can settle actual/potential tribunal claims and, unlike a standard settlement agreement, does not legally require independent advice (though it’s still wise). Citizens Advice+1
A private settlement agreement is broader and more detailed (references, covenants, warranties, tax) and must meet the s.203 advice conditions. Legislation.gov.uk

2) Know your negotiation levers (what “fair” looks like)

A. Claim strength and comparators

Your starting point is “What would a tribunal likely award if we don’t settle?” That drives whether the offer is fair.

Unfair dismissal (ordinary): compensatory award capped at the lesser of one year’s pay or £118,223 for claims after 6 April 2025. The basic award and redundancy are impacted by the week’s pay cap (£719). DLA Piper GENIE+1
Discrimination (Equality Act) & whistleblowing: uncapped compensation; tribunals also award injury to feelings guided by Vento bands (from 6 April 2025: lower £1,200–£12,100; middle £12,100–£36,400; upper £36,400–£60,700; exceptional cases above that). Courts and Tribunals Judiciary

Example:
If an employee’s potential unfair dismissal claim (no discrimination) likely leads to 6 months’ net loss at £3,000/month, that’s ~£18,000 plus basic award. A settlement in the £15,000–£25,000 range might be defensible depending on risks, mitigation, and references. But if there’s discrimination risk, a fair settlement often exceeds that range — reflecting uncapped loss and potential Vento injury to feelings bands. Courts and Tribunals Judiciary

B. Tax — structure for value, not just headline numbers

PENP / PILON (payment in lieu of notice) is taxed as earnings; only genuine termination compensation may fall under the £30,000 exemption (ITEPA rules). Check post-employment notice pay calculations carefully. GOV.UK
Moorthy v HMRC confirms “injury to feelings” on termination is taxable under termination payment rules (not automatically tax-free). Don’t rely on labelling to avoid tax. Employment Cases Update

Employers: Present a tax breakdown in the offer (salary/notice/holiday taxed; potential ex-gratia and timing). Employees: Ask for PENP calculations and payroll timings in writing.

C. References and announcements

An agreed reference can be as valuable as cash. Negotiate a word-for-word annex and non-derogation clause so HR and managers stay consistent.

D. Restrictive covenants — pay for what you need

If the employee already has restrictive covenants (non-compete, non-solicit), ensure they’re reasonable and tailored. The Supreme Court in Tillman v Egon Zehnder [2019] UKSC 32 clarified when over-broad wording can be “blue-pencilled,” but don’t assume a court will fix poor drafting. Fairness often means narrowing scope/duration/territory rather than over-reaching. Trowers & Hamlins

E. Confidentiality & whistleblowing carve-outs

Confidentiality (NDA) clauses cannot prevent protected disclosures (whistleblowing) or reporting crimes/regulatory issues. Build explicit carve-outs for PIDA, HMRC, regulators, legal/medical advisers, and immediate family. The government and ACAS are explicit on this, and tighter restrictions are being advanced in policy. Reuters

3) A step-by-step negotiation plan on a fair employment settlement agreement in the UK

Step 1 — Gather your numbers and risks

Employees: Draft a Schedule of Loss (salary, benefits, bonus, pension, job-search costs) and identify any discrimination/whistleblowing factors raising the value beyond unfair dismissal caps. Working Families
Employers: Prepare a reasoned offer referencing claim value ranges, notice/PENP, performance or redundancy rationale, and business protections sought.

Step 2 — Choose the right channel

For clean exits without tribunal proceedings, a settlement agreement is typical. Where an ET claim is on foot or imminent, consider ACAS COT3 for a faster, narrower deal. Acas+1

Step 3 — Set a respectful tone (and keep it admissible)

Allow at least 10 calendar days to consider; avoid pressure tactics. If you’re relying on protected conversations (s.111A), remember the limits — e.g., they don’t cover discrimination claims.
Avoid saying anything you wouldn’t want a tribunal to see if the protections don’t apply (see Mezzotero). CaseMine

Step 4 — Negotiate the package, not just the headline figure

Checklist of negotiables:

Money: ex-gratia sum, bonus/commission treatment, unvested equity, holiday, PENP clarity. GOV.UK
Timing: payroll dates, termination date (notice served/worked vs waived), garden leave.
Reference: annexed wording; HR confirmation to respond only per annex.
Announcements: internal/external scripts; LinkedIn wording if relevant.
Covenants: narrow scope/duration; remove “interested in” shareholding wording where unnecessary (Tillman risk). Trowers & Hamlins
Confidentiality/NDA: standard obligations plus explicit whistleblowing carve-outs. GOV.UK
Non-disparagement: mutual and limited to senior spokespeople.
Employer pays legal fees: very common; specify amount + VAT (e.g., £500–£1,000+ depending on complexity). (Practice informed by ACAS guidance and market norms.) A C Employment Solicitors

Step 5 — Get the paperwork right

Confirm s.203 ERA compliance (adviser identified, insured, certificate wording, specific claims listed). Legislation.gov.uk

Step 6 — Sanity-check tax and payroll

Ask for a tax allocation schedule showing what’s taxed and what may fall under the £30,000 termination exemption; ensure PENP is correctly calculated. GOV.UK

4) Realistic examples you can use

Example A – Employee (unfair dismissal risk only):
Base salary £48,000; 3 months’ notice; 5 years’ service; no discrimination elements.

Likely tribunal loss if successful: 4–6 months net earnings (~£12k–£18k) + basic award.
Negotiation aim: £18k–£25k total value plus agreed reference and neutral announcement.
Why: balances litigation risk, mitigation duty, and time value of money (and avoids employer costs).

Example B – Employee (potential discrimination):
Same facts, but with sustained harassment evidence.

Adds injury to feelings (middle band likely) and potential career loss (uncapped). Fair can justify materially higher figure, plus structured tax wording and costs. Courts and Tribunals Judiciary

Example C – Employer (key client team member):
Protect pipeline with narrow, enforceable non-solicit (12 months for specified, current accounts) and confidentiality. Avoid overly broad non-compete that risks being severed or binned (see Tillman). If you really need a non-compete, pay for it via uplift in the ex-gratia sum. Trowers & Hamlins

5) Template wording you can adapt (plain English)

Reference (annex):
“Reference for [Name]
[Name] was employed by [Company] from [Date] to [Date] as [Job Title]. Their responsibilities included [X, Y, Z]. During employment, [Name] met required standards and maintained professional relationships. We wish [Name] well in their future career.”

Non-disparagement (mutual):
“Neither party will make or publish any statement that disparages the other, save for statements required by law, regulation, or to legal/medical advisers or immediate family.”

Whistleblowing carve-out (mandatory):
“Nothing in this agreement prevents the Employee from making a protected disclosure under the Public Interest Disclosure Act 1998, reporting a suspected criminal offence, cooperating with a regulator, or complying with a legal duty.” GOV.UK

Tax allocation (illustrative):
“PENP £X (taxable as earnings); Holiday pay £Y (taxable); Ex-gratia compensation £Z (to be treated under ITEPA Part 6, with up to £30,000 potentially exempt subject to law). The Company will operate PAYE where required.” GOV.UK

6) Common pitfalls — and how to avoid them

Relying on “without prejudice” when there’s no dispute
If you open with “let’s have a without prejudice chat” but no dispute exists, your conversation may be admissible (Mezzotero). Use s.111A protected conversations carefully and avoid improper behaviour. CaseMine+1
Over-broad non-competes
Draft covenants by role, market, and geography. Remember Tillman — courts may sever, but don’t bank on rescue. Narrow, pay-worthy restrictions are more defensible. Trowers & Hamlins
Tax mis-labelling
Calling a payment “injury to feelings” won’t always make it tax-free; Moorthy shows HMRC and tribunals look at substance. Employment Cases Update
Ignoring whistleblowing rights
NDAs cannot gag protected disclosures; build explicit carve-outs. Policy direction is tightening on misuse of NDAs. GOV.UK+1
Rushing the signature
ACAS indicates 10 days is the norm — less can raise fairness concerns and jeopardise s.111A protections. Acas

7) What’s a “good” number? Using current caps and bands

When sanity-checking a proposal, weigh it against:

Unfair dismissal cap (£118,223) and week’s pay (£719) from 6 April 2025. DLA Piper GENIE+1
Vento bands (2025/26) for injury to feelings. Courts and Tribunals Judiciary
Sector realities (time to secure a comparable role) and mitigation.
Tax: clarity on PENP and ex-gratia components. GOV.UK

This helps both sides anchor expectations and close faster.

FAQs on Fair Employment Settlement Agreements in the UK

How long should I get to decide?
ACAS guidance: at least 10 calendar days unless otherwise agreed. Acas

Do I have to take legal advice?
Yes — the agreement is only binding if the employee receives independent legal advice from a qualified, insured adviser who is identified in the agreement. Legislation.gov.uk

Who pays my legal fees?
There’s no legal obligation, but it’s standard practice for employers to contribute (often £500–£1,000+ VAT depending on complexity). A C Employment Solicitors

Are settlement payments tax-free?
Notice pay/PENP and holiday pay are taxable. Some termination compensation may benefit from the £30,000 exemption, but details matter; get tax wording checked. GOV.UK

Can I still whistleblow after signing?
Yes. No settlement can stop you making a protected disclosure or reporting crimes/regulatory issues. Good agreements include explicit carve-outs.

Is a COT3 better than a settlement agreement?
They serve different purposes. A COT3 settles disputes via ACAS and can be quicker/leaner; a settlement agreement is broader with more tailored clauses (and requires independent advice). Citizens Advice

What if my employer says the chat is ‘without prejudice’?
If there’s no dispute, that label may not protect the conversation (see Mezzotero). Proceed carefully and take advice. CaseMine

What if restrictive covenants look too wide?
Ask to narrow them. Courts can sometimes sever wording (see Tillman), but better to agree fair, focused restrictions up front. Trowers & Hamlins

What compensation is typical?
It varies with claim strength, seniority, mitigation, and PR risks. Use the caps/bands and your Schedule of Loss to test fairness and justify your target range. DLA Piper GENIE+1

How MAR Legal helps (fast, practical, protective)

For employees: We review offers, build a negotiation plan (including your Schedule of Loss and reference), fix tax wording, and push for fair terms — quickly.
For employers: We scope risk, draft compliant agreements, tune covenants, manage NDAs/announcements, and close efficiently without jeopardising protections.

Start now: +44 (0)161 491 3933 (tel:+441614913933) | info@marlegal.co.uk

Real UK case notes to inform strategy

BNP Paribas v Mezzotero [2004] — “without prejudice” didn’t apply where no dispute existed; careless exit chats can become evidence. Use s.111A or follow fair process. CaseMine
Tillman v Egon Zehnder [2019] UKSC 32 — Supreme Court allowed limited severance of over-broad non-compete wording; draft precisely. Trowers & Hamlins
Moorthy v HMRC — “injury to feelings” tied to termination can be taxable; don’t assume exemptions. Employment Cases Update

Talk to MAR Legal for your Fair Employment Settlement Agreement in the UK

A fair settlement agreement balances value, certainty, and dignity. Use the legal framework and current caps/bands to set expectations, negotiate the package (not just the number), and document tax, references, and covenants with precision.

When in doubt, get expert help. A short conversation now can save months of stress later.

Phone: +44 (0)161 491 3933 (Apollo-friendly: tel:+441614913933)
Email: info@marlegal.co.uk
Visit: MAR Legal – Employment Settlement Agreements

How to Negotiate a Fair Employment Settlement Agreement in the UK