Redundancy is one of the most common situations in which employees are offered a settlement agreement. If you have been told your role is at risk, or you have been handed an agreement alongside a redundancy package, this guide explains how settlement agreements work in a redundancy situation, what your agreement should include and what to check before you sign.
Key takeaways
What you need to know
- A settlement agreement is often offered during a redundancy, usually in exchange for a payment and your agreement not to bring certain claims.
- If you have at least two years' continuous service, you are generally entitled to statutory redundancy pay, and your agreement should normally reflect this.
- Redundancy pay can generally be paid tax-free up to £30,000, but notice pay and holiday pay are usually taxable.
- By signing, you will usually give up the right to challenge the fairness of the redundancy, so it is worth checking the process first.
- Independent advice is a legal requirement before signing, and the cost is usually covered by your employer.
Why are settlement agreements used in redundancy?
A redundancy can be handled through a formal process alone, but many employers choose to offer a settlement agreement alongside it, or instead of completing it. In exchange for an agreed payment, you agree not to bring certain claims against your employer, such as a claim that the redundancy was unfair.
For your employer, this gives certainty that the redundancy will not be challenged later. For you, it can mean a better financial package, an agreed exit date and terms such as an agreed reference that you would not otherwise be guaranteed.
A settlement agreement may be offered at different stages, such as at the start of a redundancy process, part way through consultation or once a decision has been made. Settlement agreements are commonly entered into while you are still employed, with your employment ending on an agreed termination date. These discussions often take place in a without prejudice or protected conversation, which generally cannot be used as evidence later.
"A redundancy settlement agreement is typically a trade: a payment and agreed terms, in exchange for giving up the right to challenge how the redundancy was handled."
What counts as a genuine redundancy?
In legal terms, redundancy is a type of dismissal from your job, where a role is no longer needed. It generally arises where your employer is closing the business, closing your workplace, or changes the types or number of roles needed to do certain work. It is the role that becomes redundant, not the person.
Your employer should generally follow a fair process. This usually includes:
- Speaking with employees who might be made redundant to discuss the situation
- Consulting with employees about the proposed redundancy before a final decision is made
- Using fair and objective criteria if selecting from an appropriate pool of employees (for example, performance and ability, attendance records and disciplinary records) where the job still exists
- Discussing provisional selection for redundancy with employees
- Considering whether there is suitable alternative employment available within the organisation or an associated company
- Confirming the outcome of the process to the employees and explaining next steps
- Following additional collective consultation rules where larger numbers of redundancies are proposed within a certain time period
Additional protections may apply in some situations. For example, employees who are pregnant, or on certain types of family-related leave or who have recently returned from such leave, may have priority for any suitable alternative vacancies.
Important
Signing a settlement agreement will usually mean giving up the right to bring a claim that the redundancy was unfair or discriminatory. If you have concerns about how you were selected or how the process was handled, raise them with your adviser before you sign.
What should a redundancy settlement agreement include?
Every agreement is different, but a redundancy settlement agreement will commonly deal with some or all of the following:
| Element | What to check |
|---|---|
| Statutory redundancy pay | If you have at least two years' continuous service, you are generally entitled to a statutory redundancy payment. Your agreement should normally include at least this amount. |
| Enhanced redundancy pay | Some employers pay more than the statutory minimum, either under a contractual or policy-based scheme or as part of the negotiated settlement. |
| Notice pay | Whether you will work your notice, be placed on garden leave or receive a payment in lieu of notice. |
| Holiday pay | Payment for any accrued but untaken holiday up to your termination date. |
| Outstanding pay and bonus | Any salary, commission or bonus owed up to your termination date. |
| Pension and benefits | How pension contributions and benefits, such as private medical insurance or a company car, are dealt with when your employment ends. |
| Reference | An agreed reference can give you certainty over what a future employer will be told. |
| Legal fees | A contribution from your employer towards the cost of your independent advice. |
Our article on what a settlement agreement covers explains the other clauses you are likely to see.
How is statutory redundancy pay calculated?
Statutory redundancy pay is based on your age, number of years in the job and weekly pay. For each complete year of service, up to a maximum of 20 years, you are generally entitled to:
- Half a week's pay for each full year worked when you were under 22
- One week's pay for each full year worked when you were between 22 and 40
- One and a half weeks' pay for each full year worked when you were 41 or older
Weekly pay is subject to a statutory cap, which is usually reviewed each April. From 6 April 2026, the cap is £751 a week, which means the maximum statutory redundancy payment is currently £22,530.
For example, if you are 45, have worked for your employer for 10 full years and earn £600 a week, you would generally be entitled to 12 weeks' pay (6 years at one week's pay for the years you were 35–40, and 4 years at one and a half weeks' pay for the years you were 41–44). That gives a statutory redundancy payment of £7,200.
How is a redundancy payment taxed?
Redundancy payments, along with other qualifying termination payments such as certain ex gratia payments, can generally be paid tax-free up to a combined total of £30,000. Anything above that is usually subject to tax.
Other elements, such as notice pay, holiday pay, salary and bonus, are usually taxable in full. Our article on how settlement agreement figures are calculated explains this in more detail.
Voluntary redundancy and settlement agreements
Some employers invite employees to volunteer for redundancy, often in return for an enhanced package. Where you accept voluntary redundancy, your employer will commonly ask you to sign a settlement agreement as a condition of receiving the enhanced terms.
Volunteering does not mean you have to accept the first terms offered. There may still be room to negotiate.
Before you sign
You cannot be forced to sign a settlement agreement, and you should be given a reasonable period to consider the terms and take advice. The ACAS Code of Practice on settlement agreements recommends at least 10 calendar days.
Your adviser should explain what you are giving up, check that your redundancy pay and other entitlements have been calculated correctly, and they can also help you assess whether the overall package is reasonable in your circumstances. If something does not look right, there may be room to negotiate, for example an enhanced payment, a later termination date or an agreed reference.
Our settlement agreement checklist covers the key points to review before you sign.
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Frequently asked questions
Do I have to sign a settlement agreement if I am being made redundant?↓
No. Signing is always voluntary. If you decline, your employer may continue with the redundancy process, but you will keep any rights you have, including the right to statutory redundancy pay if you qualify and the right to bring a claim if the redundancy was unfair.
Will I still get statutory redundancy pay if I sign a settlement agreement?↓
Your agreement should normally include at least any statutory redundancy pay you are entitled to. If you have at least two years' continuous service, check that the amount has been calculated correctly before you sign.
How much statutory redundancy pay will I get?↓
It depends on your age, length of service and weekly pay. Weekly pay is capped at £751 from 6 April 2026 and the maximum statutory redundancy payment is currently £22,530. Your employer may pay more under an enhanced scheme or as part of a settlement.
Is redundancy pay tax-free?↓
Statutory and enhanced redundancy pay can generally be paid tax-free up to £30,000, together with other qualifying termination payments. Notice pay, holiday pay, salary and bonuses are usually taxable in full.
Do I get notice pay as well as redundancy pay?↓
Generally, yes. Notice pay is separate from redundancy pay. Whether you work your notice, are placed on garden leave or receive a payment in lieu of notice, your agreement should deal with both.
Can I negotiate a redundancy settlement agreement?↓
Often, yes. Depending on your circumstances, you may be able to negotiate a higher payment/enhanced redundancy package, a later termination date, an agreed reference or other terms. Your adviser can help you assess whether there is room to negotiate.
Can I challenge my redundancy after signing a settlement agreement?↓
Generally, no. Once a valid settlement agreement has been signed, you will usually have given up the right to bring the claims it covers, including a claim that the redundancy was unfair. That is why it is important to raise any concerns before you sign.
What if I have been offered voluntary redundancy?↓
Voluntary redundancy packages are commonly linked to a settlement agreement. You should still take independent advice, check the figures and consider whether the terms are reasonable before you accept.
Who pays for legal advice on a redundancy settlement agreement?↓
In most cases, your employer makes a contribution towards the cost of your independent advice, and this is usually set out in the agreement itself.
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Get in touch →This article provides a high-level overview for general information purposes only and does not constitute legal advice. It should not be relied upon as a substitute for specific legal advice tailored to your individual circumstances.
Should you choose to formally instruct us, legal services will be provided by Nexa Law Limited. Employment Settlement Solicitor is a trading name of RJB Legal Services Ltd, a limited company registered in England and Wales with number 17353836. RJB Legal Services Ltd does not provide legal advice. RJB Legal Services is a consultant practice of Nexa Law Limited, a limited company registered in England and Wales with number 10209198, which is authorised and regulated by the Solicitors Regulation Authority under SRA number 633024.