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Do I have to pay tax on my settlement agreement?

There are several elements within a settlement agreement that are usually taxable. These include but are not limited to: –

  • Salary and benefits up until termination date
  • Payment for accrued but untaken annual leave
  • Bonuses
  • Pay in lieu of notice (PILON)
  • Payments made in respect of restrictive covenants and confidentiality 


It used to be the case that PILON payments could sometimes be paid tax free. This is no longer possible. It is therefore important that you either work your full notice, and this is stated within the settlement agreement, or that you are paid in lieu of your notice period (or work part of your notice and paid in lieu of the remaining period). Alternatively, a ‘post-employment notice pay’ calculation will need to be undertaken. 

With regards to the ‘settlement payment’ (also known as ex-gratia or termination payment, which may include statutory redundancy pay) the general rule is that the first £30,000 is not subject to tax. 

It is very common for employers to seek a ‘tax indemnity’ within the settlement agreement. This means that if HMRC decided that tax is owed; you as the employee would ultimately be liable for the tax rather than the employer as you are agreeing to reimburse the employer for the additional tax that they may need to pay. The final decision as to whether a sum is taxable is for HMRC, not for your employer or for us as your solicitor.

Please note that this is for general reference and is not intended to be specific legal advice.  If you need assistance with advice on a settlement agreement or to negotiate a settlement agreement please get in touch to speak to one of our friendly solicitors on 01483 303636 or email to see how we can help you.