What is a redundancy settlement agreement and how can employers use one?

From 6 April 2026, the maximum weekly pay used to calculate statutory redundancy rose to £751, capping the statutory payment at £22,530 (GOV.UK), but many employers now offer considerably more through a redundancy settlement agreement to secure a clean, dispute-free exit. Used correctly, a settlement agreement gives both employer and employee certainty; used carelessly, it can be legally worthless or even trigger the very tribunal claim it was meant to prevent. This guide sets out exactly what employers need to get right, from independent legal advice to HMRC's £30,000 tax exemption.

Can an employee refuse to sign a redundancy settlement agreement?

A redundancy settlement agreement is a legally binding agreement between an employer and employee that sets out the terms of an agreed employment exit. It allows both parties to negotiate the conditions of termination, often including compensation, notice arrangements and confidentiality obligations, while the employee agrees not to pursue certain employment claims. For employers, a settlement agreement can provide greater certainty during workforce changes by creating a documented agreement around the employee’s departure. However, it does not automatically replace statutory redundancy obligations, and employers must still ensure they follow a fair redundancy process where applicable.

How does a redundancy settlement agreement work?

A redundancy settlement agreement allows both parties to agree specific terms for ending employment. The employee usually receives an agreed financial package or other benefits in return for waiving certain employment claims against the employer. For the agreement to be legally valid, it must be in writing, relate to specific claims and the employee must receive independent legal advice from an appropriate adviser. Making a formal offer reduces uncertainty and helps both parties understand the consequences of signing. Employers should clearly outline what payments are being offered, the termination date, any confidentiality obligations and which claims the employee agrees not to pursue. 

How long should an employee be given to consider a settlement offer?

Redundancy is a formal process where an employer removes a role because it is no longer required, while a settlement agreement is a voluntary contract negotiated between the employer and employee. A redundancy process usually involves consultation, selection and statutory rights, whereas a settlement agreement focuses on agreeing on the terms of an employee’s departure.

Employers may use redundancy and settlement agreements together where appropriate, for example, by offering an enhanced package to achieve an agreed exit. However, employers should not use a settlement agreement as a way to bypass redundancy responsibilities or avoid consultation requirements.

When should employers consider a redundancy settlement agreement?

A redundancy settlement agreement can help employers manage employee exits where both parties want to agree the terms of ending employment. While settlement agreements can provide greater certainty around compensation and future claims, employers should only use them where they are appropriate and continue to meet their legal obligations throughout the redundancy process.

What are the benefits of using a redundancy settlement agreement?

A settlement agreement instead of redundancy may be suitable where an employer and employee prefer a negotiated exit rather than continuing through a full redundancy process. However, employers should not use settlement agreements to avoid statutory redundancy responsibilities. Knowing your redundancy rights creates a fair selection procedure; where a role is genuinely redundant, employers should still consider consultation requirements 

⚠️Warning: A settlement agreement does not automatically protect an employer from redundancy claims. If the redundancy process itself is unfair, employees may still have potential legal remedies depending on the circumstances. 

What legal requirements apply to redundancy settlement agreements?

A compliant redundancy settlement agreement must meet specific legal conditions before it can prevent certain employment claims. Employers should ensure the process is legally sound as well as the document itself. The main purpose of these requirements is to ensure employees understand their rights and make an informed decision before agreeing to waive claims.

Why do employees need independent legal advice for a settlement agreement?

Independent legal advice is a mandatory requirement for a settlement agreement to become legally binding. The employee’s adviser must explain the effect of the agreement and how it affects their ability to bring employment claims. The adviser must be a qualified solicitor, authorised trade union representative or another certified adviser who meets the legal requirements. For employers, discussing and negotiating an offer with sufficient time is essential. Pressuring an employee to sign quickly may create challenges around whether the agreement was entered into voluntarily.

What must be included in a legally valid redundancy agreement?

A valid agreement should clearly identify the claims being settled, the agreed payments and the obligations of both parties. Employers should avoid using unclear wording that could make the scope of the agreement uncertain. The agreement should clearly set out the terms that have been agreed upon between the employer and employee. Depending on the circumstances, this may include details of the compensation being offered, the employee's employment end date, confidentiality provisions and any agreed reference. Employers and employees may negotiate these terms before reaching a final agreement.

How should employers negotiate a redundancy settlement?

Negotiating redundancy requires careful communication and planning. Employers should approach discussions openly while ensuring employees understand that accepting a settlement offer is voluntary. A structured negotiation process can help employers manage costs, reduce uncertainty and reach an agreement that works for both parties.

What can employers negotiate in a redundancy settlement?

A redundancy settlement can include different financial and practical terms depending on the circumstances. Employers may negotiate enhanced compensation, notice arrangements, references, confidentiality obligations and termination dates. Aligning with the HMRC Employment Income Manual prevents employers from making critical mistakes. 

How does a protected conversation redundancy process work?

A protected conversation redundancy allows employers and employees to discuss settlement terms confidentially. These conversations are intended to encourage open discussions about ending employment without automatically allowing those discussions to be used in ordinary unfair dismissal proceedings. However, protection is limited and does not cover every type of employment claim, including discrimination claims.

What payments can be included in a redundancy settlement agreement?

The financial structure of a redundancy settlement agreement should be carefully reviewed because different payments may receive different tax treatment. Employers should understand which payments qualify as termination payments and which are treated as normal earnings. Correct classification helps employers avoid payroll errors and unexpected tax liabilities.

Settlement packages frequently include a payment in lieu of notice, which is fully taxable and must be isolated from the £30,000 exemption using HMRC's PENP formula.

How are redundancy settlement payments taxed?

Under HMRC rules, qualifying termination payments can generally benefit from the £30,000 tax exemption. However, not every payment made when employment ends qualifies for this treatment.

Payments such as salary, bonuses and holiday pay are normally treated as taxable earnings, while some redundancy compensation payments may fall within the termination payment rules. Employers should review payment categories carefully before finalising a settlement because incorrect classification may result in incorrect PAYE treatment. 

 What is a voluntary redundancy settlement agreement?

A voluntary redundancy settlement agreement allows employees to agree to leave voluntarily, usually in exchange for an enhanced package. This approach can help employers manage workforce reductions while potentially reducing the need for compulsory redundancies. However, participation must remain voluntary, and employers should avoid applying pressure or unfairly targeting particular employees.

The database of employers’ voluntary redundancy payments provides insight into how voluntary exit arrangements are used by organisations managing workforce changes.

How can employers avoid mistakes with redundancy and settlement agreements?

Managing redundancy and settlement agreements requires more than preparing legal documents. Employers must consider communication, consultation, payment calculations and the employee experience throughout the redundancy process.

Why can mistakes in redundancy agreements create risks?

Common mistakes include failing to provide proper legal advice opportunities, incorrectly calculating payments, using unclear clauses or treating settlement agreements as a replacement for redundancy procedures. Employers should ensure every stage of the process is documented and handled consistently.

When should employers use a redundancy agreement solicitor?

A redundancy agreement solicitor can help employers review settlement terms, assess legal risks and ensure agreements comply with employment law requirements. Professional advice is particularly valuable where there are potential discrimination concerns, senior employees or complex contractual arrangements.

How can HR teams manage settlement redundancy processes effectively?

A successful settlement redundancy process requires preparation, accurate calculations and clear communication. HR teams should create consistent procedures to ensure employees’ redundancy rights are completely fair and agreements are properly documented. 

How should employers prepare a settlement offer?

Before making a settlement offer, employers should consider why they are proposing a settlement agreement and what terms they want to include. ACAS recommends making the offer in writing so that employees can clearly understand what is being proposed and have the opportunity to consider the terms. Employers should also allow employees a reasonable period to consider the offer and seek independent legal advice before deciding whether to accept it. Providing enough time for consideration helps support a fair negotiation process and gives employees the opportunity to understand the legal effect of the agreement.

How can employers improve the redundancy settlement process?

Employers can improve outcomes by combining fair communication with professional legal guidance. A clear process helps employees understand their options while allowing businesses to manage workforce changes effectively. Using a structured approach, even for contractual redundancy pay, can reduce disputes and support smoother employee exits.

A redundancy settlement agreement can provide employers with a practical way to manage employee exits while creating certainty for both parties. However, the agreement should always form part of a wider approach that considers redundancy obligations, fair treatment and accurate payment calculations.

Employers should begin by reviewing whether a settlement agreement is appropriate, calculating all statutory and contractual entitlements, and seeking advice from a redundancy settlement agreement solicitor where risks or complex circumstances exist.

By following ACAS guidance, applying HMRC tax rules correctly and maintaining transparent communication, employers can reduce disputes and manage redundancy situations more effectively.

Payroll and HR software with built-in termination management can help employers keep redundancy and settlement payments correctly separated for tax purposes, track consultation deadlines, and maintain an auditable record of every offer and signed agreement, reducing the administrative risk that so often turns a straightforward exit into a dispute.

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