A proposed exit can look generous at first glance, particularly when one figure is labelled as a “settlement payment”. But a redundancy settlement example only becomes useful when you separate the payments, understand what rights you may be giving up and check whether the wider terms work for you.
A settlement agreement is voluntary. It can provide certainty and a clean departure, but signing it usually means waiving the right to bring specified employment claims against your employer. That is why the agreement must be reviewed carefully before you decide whether its financial and practical terms are fair.
A practical redundancy settlement example
Assume Priya is 48, earns £52,000 a year and has worked for her employer for seven years. Her role is genuinely at risk of redundancy following a restructure. After consultation, her employer offers a settlement agreement so that her employment can end on an agreed date without further process.
The headline offer is £27,100, but that is not one single payment. It is made up of the following amounts:
- £7,000 statutory redundancy pay, calculated by reference to Priya’s age, length of service and weekly pay, subject to the statutory maximum in force at the time.
- £11,000 enhanced redundancy compensation, paid in addition to her statutory entitlement.
- £8,000 pay in lieu of eight weeks’ notice.
- £600 for three days of accrued but untaken holiday.
- £500 plus VAT towards the cost of Priya obtaining independent legal advice, paid directly to her solicitor.
This means the actual termination payment is £18,000, made up of statutory and enhanced redundancy pay. The notice pay and holiday pay are contractual earnings. They should not be treated as extra compensation simply because they appear in the agreement.
The figures are illustrative, not a formula. Priya’s statutory redundancy entitlement could be different if her pay, age, start date or notice arrangements differ. Some employers also offer a higher enhancement under an established redundancy policy. Others offer a discretionary amount in return for the certainty of a signed agreement.
What the payment figure really means
The most common mistake is to compare only the proposed settlement figure with salary, rather than with what you would receive if no agreement were signed. Start by identifying your existing contractual and statutory entitlements. These may include notice pay, untaken holiday, bonus, commission, pension contributions, share-plan treatment and statutory redundancy pay.
In Priya’s case, the £8,000 notice payment and £600 holiday payment would ordinarily be due in any event if she is entitled to them. The part that rewards her for signing the agreement is therefore likely to be the £11,000 enhancement, although the full wording and circumstances matter.
Tax treatment also needs careful attention. Genuine termination compensation can usually be paid free of income tax up to the relevant £30,000 threshold, but payments for notice, holiday and other earnings are normally subject to tax and National Insurance deductions. A label in the agreement does not determine the tax position. The nature of the payment does.
Where an agreement says a sum is tax-free, it should also make clear what happens if HMRC later takes a different view. A broadly drafted tax indemnity can leave an employee exposed to tax, interest or penalties caused by the employer’s own treatment of the payment. This is a term worth querying, not simply accepting.
The offer may be fair, but the process still matters
A settlement agreement does not automatically make a redundancy process fair. Your employer should still have a genuine redundancy situation, consult appropriately and consider suitable alternative employment where relevant. The detail expected will depend on the circumstances, including the size of the proposed redundancy exercise.
For some employees, a sensible offer is one that provides additional compensation and avoids a drawn-out process. For others, the proposed amount may not reflect concerns about selection, consultation, discrimination, whistleblowing, contractual rights or a potential unfair dismissal claim. The value of a settlement is always case-specific.
Terms to check alongside a redundancy settlement payment
The financial schedule is only one part of the document. A settlement agreement often contains obligations that could affect your next role and your ability to speak about your employment after you leave.
First, check the termination date and notice arrangements. Are you expected to work notice, remain on garden leave or leave immediately? If you are on garden leave, will you continue to receive normal salary and benefits? If payment is made in lieu of notice, is it calculated correctly under your contract?
Next, look at the reference. A short factual reference may be acceptable, but it should be agreed in writing if it matters to your next move. Priya may want the agreed wording attached to the agreement, together with confirmation that the employer will provide it consistently if asked by a prospective employer.
Confidentiality clauses should also be proportionate. It is normal for an employer to protect genuinely confidential business information and the terms of a settlement. However, the clause should not prevent lawful protected disclosures, reporting criminal conduct, co-operating with regulators or obtaining legal, tax or medical advice. Mutual non-derogatory wording may be appropriate where both parties want a professional and dignified departure.
Finally, examine restrictive covenants. A settlement agreement can repeat or seek to vary restrictions relating to competitors, clients, suppliers or recruitment of colleagues. Do not assume a covenant is harmless because it appeared in your original contract. Its scope, duration and practical impact should be assessed before you sign, especially if you are joining a competitor or starting your own business.
Can Priya negotiate a better deal?
Yes, provided the approach is measured and supported by a clear rationale. Negotiation does not have to mean confrontation. It may involve asking the employer to correct a payment calculation, contribute more towards legal fees, improve the reference wording, extend the termination date or increase the enhanced payment.
For example, Priya may ask why the enhancement is £11,000 when her employer’s redundancy policy has previously offered more generous terms. She may point out that she has a strong performance record, limited time to secure a new role, or concerns about the way selection was carried out. If she has a contractual bonus due shortly after her proposed leaving date, that should be considered separately rather than disappearing into a general settlement figure.
Employers will often contribute towards the cost of independent legal advice because the agreement is not legally valid unless key statutory conditions are met. The employee must receive advice from an appropriately qualified independent adviser, the adviser must have professional indemnity insurance, and the written agreement must identify the adviser and the particular claims being settled. A contribution is helpful, but it does not mean the adviser works for the employer. The advice must be independent and focused on your interests.
Before signing, ask these questions
Before accepting a redundancy settlement agreement, establish what you would receive without it, which part of the offer is genuinely additional, and whether all sums are correctly calculated. Check whether the agreement deals properly with notice, holiday, bonuses, benefits, pension arrangements and expenses.
You should also ask whether the reference is acceptable, whether any post-termination restrictions are workable, and whether the confidentiality and tax clauses are fair. If there are concerns about the redundancy selection or consultation process, raise them before signing rather than assuming they no longer matter.
A clear, independent review can turn a confusing document into a practical decision. The right agreement is not simply the one with the largest headline number. It is one that gives you fair compensation, protects your position and lets you move on with confidence.