Are settlement agreements taxable?

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Concerned about settlement agreement tax and how it might impact your compensation package? If you want to learn more about the tax on settlement agreements, the professional solicitors at Freeman Jones Solicitors are on hand to help.

While the dream may be to receive a settlement agreement tax free, the reality is often very different. Find out how much settlement agreement tax could end up costing you below.

Do you pay tax on settlement agreements?

So, are settlement agreements taxable? Unfortunately, the answer to this question isn’t as simple as ‘yes’ or ‘no’. Instead, the tax for termination payments (pay and benefits an employee receives when they leave a business), such as holiday pay, unpaid wages, and redundancy pay is the responsibility of your employer.

All these payments are taxed as normal up until your termination date as they’re covered by the UK’s termination payment tax laws. However, any remaining additional termination payment, such as a redundancy or settlement payment (also referred to as a compensation or ex-gratia payment) will be tax-free up to a threshold of £30,000.

As a result, the first £30,000 of the settlement agreement is tax-free in the UK. If your settlement agreement includes a payment over this amount, then you should bear in mind that any excess will be subject to income tax and employer National Insurance contributions.

Please bear in mind that this £30,000 threshold applies to the total of your tax-free payments. For example, you won’t be able to avoid paying tax on your settlement agreement compensation by receiving the total in separate £30,000 payments.

If you’re still unsure how much tax you’ll pay on your settlement agreement, we always recommend contacting the experts.

Expert settlement agreement advice

For clear and comprehensive answers to more related queries like ‘is a settlement agreement taxable’, please don’t hesitate to contact the professional team of solicitors here at Freeman Jones Solicitors today.

As experts in settlement agreements, we can provide vital legal support when creating and negotiating these contracts, alongside being on hand to answer a wide range of settlement agreement questions.

Instead of confusing you with complex legal jargon, we can explain these important terms in a way that’s easy to understand, helping to simplify potentially daunting legal processes.

Our essential settlement agreement advice is available to both employers and employees, so please feel free to book your free, no-obligation, 20-minute consultation to discover how we can help you today.

To find out more about our services or to discuss your specific settlement agreement requirements, simply give us a call on 01244 506 444. Alternatively, you can also send your enquiry via email to or fill in and submit our online contact form.

Our friendly team also looks forward to in-person client visits, so please feel free to drop into your local branch, be it Chester, Liverpool, Warrington, and Wrexham. We’ll also happily meet you at a more convenient location if you’re not local to the area!

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Author Colin Freeman View Profile
Colin qualified as a solicitor in 1998. He specialises predominantly in family law, litigation / dispute resolution, wills, probate and settlement agreements and has notable cases reported in the Court of Appeal and High Court.
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