This page references the tax-free termination payment threshold, which is periodically reviewed by the government — always check GOV.UK for the current figure before relying on it.
Introduction
A settlement agreement can be a genuinely good outcome — certainty, a clean break, and often more money than you’d otherwise be entitled to. But it’s also final. Once signed, you generally can’t come back later and reopen the terms, even if you realise afterwards that you misunderstood something or missed a detail that mattered.
Most of the problems that come up with settlement agreements aren’t the result of employers acting in bad faith — they’re the result of employees signing without fully understanding what a fairly standard agreement actually says. This guide covers the mistakes that come up most often, so you know what to look out for before you sign. If you haven’t already, our pillar guide on What Is a Settlement Agreement in the UK and When Is It Used? covers the basics.
Table of Contents
- Mistake 1: Signing Without Genuinely Independent Legal Advice
- Mistake 2: Not Understanding What You’re Actually Giving Up
- Mistake 3: Accepting the First Offer Without Negotiating
- Mistake 4: Overlooking How the Payment Is Taxed
- Mistake 5: Not Checking Post-Termination Restrictions Carefully
- Mistake 6: Signing Under Time Pressure
- Mistake 7: Glossing Over the Reference and Confidentiality Wording
- Contact Us for Settlement Agreement Advice
- Final Thoughts
- Frequently Asked Questions
Mistake 1: Signing Without Genuinely Independent Legal Advice
Independent legal advice isn’t optional — a settlement agreement isn’t legally binding without it, and your employer will typically contribute toward the cost. The mistake isn’t skipping this step entirely, since the agreement won’t take effect without it, but treating it as a box-ticking formality rather than a genuine opportunity to understand and query what you’re signing.
Rushing through the advice meeting, not asking questions about anything you don’t understand, or using an adviser purely because they’re convenient rather than because they’ve actually reviewed your specific terms in detail, all undermine the point of the requirement. This advice is there to protect you — it’s worth treating it that way.
Mistake 2: Not Understanding What You’re Actually Giving Up
A settlement agreement’s central function is a waiver — in exchange for the payment offered, you’re generally giving up the right to bring most tribunal claims relating to your employment, including claims like Unfair Dismissal you might otherwise have pursued. The mistake here is signing without a clear picture of what claims you might actually have had, and therefore what you’re really trading away.
This matters most where something happened during your employment that you haven’t fully thought through — a grievance you never raised, treatment you suspected but never questioned, or a redundancy process you weren’t sure was handled fairly. It’s also worth checking that the waiver is limited to claims arising up to the date of the agreement, rather than drafted so broadly it could affect rights that haven’t yet arisen, such as accrued pension entitlements or a personal injury you’re not yet aware of.
Mistake 3: Accepting the First Offer Without Negotiating
The figure in your first draft agreement is very often a starting point, not a final offer, and treating it as non-negotiable is one of the most common — and most costly — mistakes employees make. This applies both to the headline payment and to other terms, such as the reference wording, the treatment of outstanding benefits, or a contribution toward job-search support.
Whether there’s genuine room to negotiate, and how much, depends on your specific circumstances — including how strong any underlying claim might be. Our guide on Can You Negotiate a Settlement Agreement? covers how this typically works in practice.
Mistake 4: Overlooking How the Payment Is Taxed
Genuine termination payments, including enhanced redundancy or settlement payments, can usually be paid tax-free up to a combined threshold, currently £30,000 — but not everything in a settlement agreement automatically qualifies for that treatment. Payment in lieu of notice is normally taxed as earnings regardless, and holiday pay is always taxable. Assuming the entire headline figure will land in your account tax-free, without checking how it’s actually been structured, is a mistake that can lead to an unwelcome surprise once the payment arrives.
This is exactly the kind of detail your independent legal adviser should walk you through — if the breakdown between taxable and tax-free elements isn’t clearly explained to you, it’s worth asking specifically.
Mistake 5: Not Checking Post-Termination Restrictions Carefully
Many settlement agreements either introduce new restrictions or confirm that existing ones from your original employment contract — around competing with your employer, soliciting former colleagues or clients, or using confidential information — continue to apply after you leave. The mistake is not reading these closely enough to understand how they might affect your next role, particularly if you’re moving to a competitor or a closely related field.
Restrictions that are unreasonably broad in scope, duration, or geography aren’t always enforceable, but that’s a legal judgment worth getting specific advice on rather than assuming either way.
Mistake 6: Signing Under Time Pressure
Feeling rushed into signing — whether because of an explicit deadline or just the discomfort of the situation — leads people to skip exactly the checks covered in this guide. ACAS guidance generally treats a reasonable period to consider a settlement offer as appropriate, and a genuinely unreasonable deadline is itself something worth raising rather than simply accepting. Our guide on How Long Do You Have to Consider a Settlement Agreement? explains what’s generally considered fair.
If you don’t feel you’ve had enough time to properly understand the agreement, it’s worth saying so directly rather than signing anyway and hoping for the best.
Mistake 7: Glossing Over the Reference and Confidentiality Wording
The confidentiality clause and the agreed reference are often treated as boilerplate, but they can matter more in practice than employees expect. It’s worth checking exactly what the reference says, who’s authorised to give it if a future employer calls to verify it informally, and whether the confidentiality terms are reasonable rather than so broad they’d make it difficult to explain your own employment history honestly in future. It’s also worth knowing that confidentiality clauses can’t lawfully prevent you from reporting matters like criminal conduct or making a protected disclosure to a regulator — a properly drafted agreement should reflect that, and it’s worth querying if it doesn’t appear to.
Contact Us for Redundancy and Settlement Agreement Advice
Most settlement agreement mistakes happen not because employees ignore the terms, but because the terms look standard and reasonable on a first read, when the details that actually matter are easy to miss without experience reviewing them regularly.Final Thoughts
A settlement agreement can be a genuinely good resolution, but only if you go into it understanding exactly what you’re agreeing to. Slowing down, asking questions during your legal advice meeting, and checking the specific points covered in this guide — rather than assuming a standard-looking agreement is automatically fine — is the difference between a settlement that genuinely works in your favour and one you come to regret.
Frequently Asked Questions
Can I negotiate a settlement agreement once I've received it?
Yes, in most cases. The initial offer isn’t necessarily final, and both the payment and other terms can often be discussed further before you sign.
Is the whole settlement payment tax-free?
Not necessarily. Genuine termination payments are usually tax-free up to a combined threshold, currently £30,000, but elements like notice pay and holiday pay are generally taxed as normal earnings regardless of that threshold.
What happens if I sign without fully understanding a clause?
Once signed, a settlement agreement is generally final, which is exactly why it’s worth asking questions during your legal advice meeting rather than signing anything you’re unsure about.
Can my employer stop me reporting wrongdoing after I sign?
No. A settlement agreement can’t lawfully prevent you from making a protected disclosure or reporting criminal conduct, regardless of how broadly the confidentiality clause is worded.
Do I have to use the solicitor my employer suggests?
No. You’re entitled to choose your own independent adviser, though your employer’s contribution toward the cost may be based on a fixed amount.
What if I think the deadline to sign is unreasonable?
It’s worth raising this directly rather than signing under pressure. A fair opportunity to consider the agreement, including getting proper advice, is part of what makes it valid.