Being told your role is at risk of redundancy is unsettling enough. When a settlement agreement is placed in front of you shortly afterwards, it can feel overwhelming. You may be wondering whether the offer is fair, what the document actually commits you to, and whether you have any room to push back.
This guide is written specifically for that situation. It is not a general overview of settlement agreements — it focuses on what redundancy brings to the picture: the clauses that are particular to redundancy exits, and the legal framework that governs whether your redundancy is genuine and fair.
Settlement Agreement Clauses to Focus on in a Redundancy
A settlement agreement in a redundancy context will contain many standard provisions — but several clauses are either unique to redundancy, or take on extra significance when redundancy is the reason for leaving. These are the ones that deserve your closest attention.
1. Statutory Redundancy Pay — Is It Included or Separate?
You are entitled to statutory redundancy pay (SRP) if you have been employed for two or more years. The settlement agreement should make clear whether the lump sum payment includes your statutory redundancy pay, or whether SRP is being paid on top.
SRP is calculated using a fixed statutory formula based on age, length of service and weekly pay — you can check your entitlement using our redundancy calculator.
2. Pay in Lieu of Notice (PILON)
Check whether your notice is being worked, paid, or a combination of both. If the employer is paying your notice rather than requiring you to work it, this is a PILON payment. Generally a PILON payment is taxable as earnings — regardless of what your contract says — so this portion of any payment will be subject to income tax and national insurance.
The settlement agreement should state clearly how notice is being dealt with and what tax treatment applies to each element of the total payment. Our guide on what is and isn’t tax-free explains this in more detail.
3. Enhanced Redundancy Pay
Many employers offer more than the statutory minimum — this is called enhanced redundancy pay. If your employer has a written redundancy policy, or if there is a custom and practice of paying enhanced redundancy pay that is established, consistently applied and well known to the workforce, you may have a contractual or implied right to that enhanced figure.
Check your contract of employment, your staff handbook, and any communications you have received about the redundancy process. If the settlement offer reflects only statutory redundancy pay and your employer has historically paid more, this may be point to explore further (if the offer on the table is less).
4. The Waiver Clause and What Claims You Are Settling
Settlement agreements typically contain a clause listing the employment law claims you are waiving in exchange for the payment. In a redundancy situation, look carefully at whether the list includes unfair dismissal, redundancy pay and wrongful dismissal.
If the redundancy process has been poorly handled — for example, if the selection criteria were questionable, consultation was inadequate, or suitable alternative roles were not offered — you may have a potential unfair dismissal claim. Signing the agreement extinguishes that claim. The enhanced payment the employer is offering you is, in part, consideration for the surrender of that right. It is important to understand what you are giving up before you sign. Our companion guide on fair and unfair redundancy sets out the legal framework in full — including what makes a selection automatically unfair and when discrimination claims may arise.
5. Suitable Alternative Employment
If you are interested in a suitable alternative role and you’d prefer that to the settlement agreement route, consider whether you can seek an extension of time to sign the settlement agreement to allow the internal recruitment process to conclude.
6. Your Statutory Right to Paid Time Off to Look for Work
This is a right that many employees facing redundancy are simply unaware of — and it is one worth understanding before you sign anything.
Under sections 52 and 53 of the Employment Rights Act 1996, an employee who has been given notice of dismissal by reason of redundancy is entitled to take a reasonable amount of paid time off during working hours before the end of their notice period, for the purpose of looking for new employment or arranging training. The right applies to employees who will have completed at least two years’ continuous service by the time their notice expires.
So far, so straightforward — but here is where the settlement agreement becomes relevant. The section 52 right applies to employees who are working their notice period. If your settlement agreement instead provides for your notice to be paid in lieu rather than worked, the statutory right falls away — because arguably you have not given notice of dismissal by reason of redundancy.
If you wish to preserve these rights in the period you are working between signing the settlement agreement and the date your employment ends, there are two ways to approach this:
- If you are working your notice: confirm that the agreement does not contain any clause that could be read to restrict or waive the section 52 right. The right is a statutory entitlement and cannot be contracted out of, but an employer might seek to manage how and when time off is taken. The agreement should not create practical obstacles to exercising it.
- If your notice is being paid in lieu: consider requesting that the agreement includes a specific clause that mirrors the statutory right — in practical terms, this means the employer agrees to allow you a reasonable amount of paid time to attend interviews or arrange training, or that this is treated as having been provided for within the overall settlement terms. Some employers will agree a fixed number of days for this purpose; others may be willing to give a degree of flexibility. Either way, having this recorded in the agreement gives you something concrete to rely on.
It is a modest right in monetary terms — but its practical value in helping you move on quickly to new employment should not be underestimated. It is also worth checking whether your employer’s redundancy policy offers anything beyond the statutory minimum.
7. Re-employment Restrictions
Redundancy settlement agreements frequently include clauses restricting your ability to return to the employer after your employment ends. These take two common forms, and both deserve careful scrutiny.
The first is an outright prohibition on re-employment — a clause that prevents you from applying for, or accepting, any role with the employer (or associated group companies) for a specified period, often six or twelve months but sometimes longer. This type of clause is relatively common and may cause little practical difficulty if returning to the employer was never your intention. However, if the employer is a large organisation with multiple brands or subsidiaries, the breadth of the restriction matters. A clause that sweeps in the entire group could prevent you from applying for roles with businesses you would not ordinarily associate with your former employer at all.
The second form is a claw-back clause. Rather than prohibiting re-employment entirely, this type of clause allows you to rejoin the employer but requires you to repay some or all of the termination payment if you do so within a defined period. Claw-back periods of one to two years are not unusual. You should check whether the repayment obligation is proportionate — does it reduce over time, or does the full sum remain repayable until the period expires? And does it apply even if the employer approaches you, rather than the other way round? If you are in a specialist field where future contact with the employer is genuinely possible, this clause needs to be read carefully and, if necessary, negotiated.
8. Confidentiality — and the Redundancy Exception
Most settlement agreements include a confidentiality clause that prevents you from disclosing the existence of the agreement or the terms of the settlement, and the circumstances leading up to it. In a redundancy, this clause requires particular attention — for two distinct reasons.
First, consider whether the confidentiality clause allows you to confirm, if asked by a future prospective employer, that your employment ended by reason of redundancy. I have come across settlement agreements that sought to constrict the employee to answering ‘no comment’ when asked why they left, which is ridiculous.
Redundancy is a neutral and commonplace reason for leaving work, and most employees would want to be free to say so. A confidentiality clause that is drafted too broadly may prevent you from giving any explanation of your departure, which can create difficulties in interviews or when a prospective employer conducts references. A well-drafted redundancy settlement should include a carve-out permitting you to confirm, at minimum, that your role was made redundant. If the draft does not include this, it is a straightforward and reasonable amendment to request.
Second — and this is a point that is often missed — consider whether the confidentiality clause would prevent you from providing information to an insurer if you hold an income protection or redundancy insurance policy. We address this in more detail below, but the key point to flag here is that the confidentiality clause and any insurance carve-out must be read together. If you have relevant insurance, the two provisions need to be consistent.
9. Income Protection and Redundancy Insurance
If you hold a personal income protection policy, a payment protection policy, or a standalone redundancy insurance policy, your settlement agreement has potential financial implications that go beyond the termination payment itself — and this is an area where employees frequently overlook important detail.
The first question is whether your policy responds to the circumstances of your departure at all. Many policies are written to cover compulsory redundancy only — meaning a dismissal by reason of redundancy that is not initiated or (arguably) agreed to by the employee. Where a settlement agreement is involved, insurers may argue that the termination was agreed or voluntary in nature and therefore falls outside the policy. This is a live issue even where the underlying reason is genuine redundancy. You should obtain the full policy wording and check how the insurer defines a qualifying redundancy event before you sign anything.
Some policies extend cover to voluntary redundancy or to terminations effected under a settlement agreement, but this is not universal. If there is any ambiguity in the wording, it may be worth contacting the insurer directly — or taking separate advice — before you agree to the terms of the settlement.
The second question follows directly from the point about confidentiality above. If your policy does respond to your redundancy, you will need to provide the insurer with information to support your claim — typically confirmation of the reason for termination, your final salary, and the date your employment ended. Check whether the confidentiality clause in your settlement agreement permits this disclosure. A well-advised employer will agree to a carve-out permitting you to share necessary information with insurers for the purposes of making a legitimate policy claim. If no such carve-out exists, and the confidentiality clause is drafted in absolute terms, you may find yourself unable to make a claim on a policy you have paid premiums on for years. This is an amendment that your solicitor should be raising as a matter of course.
10. Bonuses
Bonus entitlements on a redundancy exit are often overlooked — but they can form a material part of what you are owed, and they deserve careful attention in the settlement agreement.
The starting point is to identify what kind of bonus arrangement you have. If your bonus is contractual — that is, your contract of employment guarantees participation in a scheme and sets out how the bonus is calculated — then an accrued entitlement for the current performance year is a debt owed to you subject to the applicable bonus rules, not a discretionary gesture. The settlement agreement should address it expressly: the period it covers, the amount, and how it will be taxed. Bonus payments are taxable as earnings and do not benefit from the £30,000 tax-free exemption that applies to genuine compensation payments.
If your bonus is described as discretionary, the position is more nuanced — but it is not hopeless. The courts have confirmed on multiple occasions that an employer’s discretion to pay or withhold a bonus is not unlimited. The employer must exercise that discretion in good faith and not perversely. If you performed well during the bonus year and the employer is withholding a bonus simply because your role is being made redundant, that may be challengeable. Evidence of prior bonus payments in similar circumstances strengthens your position considerably.
Watch also for schemes that condition payment on being “in active employment” at the bonus payment date. These clauses are common and can be used to deny a bonus to someone whose employment has ended before the payment date, even if the performance period was fully completed. Whether such a clause is enforceable in a redundancy context depends on the specific wording — it is worth raising with your solicitor before you agree to the settlement figures.
11. Share Options and Long-Term Incentive Plans (LTIPs)
If you have been granted share options or participate in a long-term incentive plan, your redundancy exit requires specific attention. The financial value at stake can be significant — and it is an area where the settlement agreement must be drafted carefully to protect your position.
The default position under most share plan rules is that unvested options lapse on termination of employment. However, most well-drafted plans include a distinction between “good leavers” and “bad leavers” — and redundancy is one of the most commonly specified good leaver reasons. If you qualify as a good leaver, your vested options may be preserved, and your unvested options may either vest immediately (sometimes on a pro-rated basis reflecting the proportion of the vesting period served) or continue to vest on their original schedule. The precise treatment depends on the rules of the specific plan.
Even where redundancy is not an automatic good leaver trigger, the plan rules will often give the company’s or group’s remuneration committee a broad discretion to treat a departing employee as a good leaver in any circumstances they consider appropriate. This discretion is a negotiating point. If you are being made redundant through no fault of your own, there are strong grounds to ask the employer to exercise that discretion in your favour — and this is a conversation that should happen as part of the broader settlement negotiation, not as an afterthought.
As the recent High Court case of Dixon v GlobalData PLC [2025] EWHC 2156 (Ch) shows, it can be helpful if the settlement agreement itself states your leaver status explicitly and include a schedule setting out the options or awards you hold, how many will vest, and the timeline for exercise . Leaving this to be governed only by the plan rules — which may be ambiguous, or may subsequently be amended or subject to discretion being exercised against you.
Finally, revisit the waiver clause. Check that it does not inadvertently release rights under the share plan that should be preserved. A broadly drafted waiver releasing “all claims arising from your employment or its termination” could, if poorly drafted, be read to extinguish share scheme rights that should survive your departure.
12. Pension
Pension entitlements are less commonly disputed in redundancy settlements, but there are a few points worth confirming in the agreement.
First, check the treatment of employer pension contributions during any notice period. If you are working your notice, contributions should continue as normal. If you are on garden leave, your contractual entitlements — including pension — continue to accrue. If notice is being paid in lieu, the position is more complex: PILON payments are not the same as remuneration, and whether pension contributions are payable during a PILON period depends on the wording of both the employment contract and the pension scheme rules. The settlement agreement should address this clearly. It is pretty common in my experience for PILON clauses to only entitle the employee to basic pay and not other remuneration or benefits.
Second, confirm that the waiver clause expressly excludes accrued pension rights from its scope. This is standard practice in a well-drafted agreement, but it is worth checking that the exclusion is present. A broadly drafted waiver without a pension carve-out is a drafting concern that your solicitor should flag.
13. Tax Risks: Genuineness of Redundancy, Re-employment and Proximity to Retirement
The tax advantages attached to a redundancy payment — in particular the £30,000 exemption from income tax under section 403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) — are only available where the payment is made in consequence of a genuine redundancy. HMRC is entitled to look behind the label applied to a termination payment and assess its true character. In a redundancy settlement, there are two factual scenarios that attract particular scrutiny: early re-employment, and proximity to retirement age.
Re-employment Shortly After Redundancy
If you return to work for the same employer — or a connected employer — shortly after being made redundant, HMRC may take the view that the redundancy was not genuine and that the termination payment was in reality a reward for past service or a disguised bonus. In those circumstances, HMRC can seek to recharacterise the payment as general earnings, bringing the full amount into charge to income tax and national insurance — and removing the benefit of the £30,000 exemption entirely.
The risk is heightened where the re-employment is in a similar or identical role, or where there is any pre-arrangement or understanding about a return before the redundancy takes effect. HMRC will look at all the facts, including the genuine business rationale for the redundancy, how the payment was calculated, and the nature of and timescale for any subsequent re-engagement.
This is directly relevant to how the settlement agreement is drafted. The agreement should accurately record that the termination is by reason of redundancy, and the employer should be in a position to demonstrate a clear and documented rationale for the decision — including how the redundancy payment was calculated and why the statutory definition of redundancy is met. If you have any expectation of returning to the employer in some capacity, whether as a consultant, contractor, or in a new role, you should take specialist tax advice before the settlement is signed. The tax consequences of getting this wrong can be significant.
Proximity to Retirement — The Risk That the Payment Is Treated as a Pension Payment
This is a more technical but equally important risk, and one that is particularly relevant for employees who are at or near typical retirement age when their redundancy occurs.
The general rule is that any payment made on or in anticipation of an employee’s retirement will be taxable in full as employment income under sections 393 and 394 of ITEPA 2003. Such payments are treated as a “relevant benefit” under the employer-financed retirement benefit scheme (EFRBS) legislation. Critically, they do not benefit from the £30,000 exemption that applies to genuine termination payments. The full amount is taxable — and subject to national insurance as employment income.
HMRC regards it as a question of fact whether a payment is made on or in anticipation of retirement. In practice, the risk arises where an employee is made redundant at an age when they might reasonably be expected to retire, and — particularly — where they draw their pension shortly afterwards. HMRC may look closely at situations where an employee takes their pension very soon after the termination of employment. If HMRC concludes that the true nature of the termination payment was a retirement gratuity rather than genuine redundancy compensation, the tax consequences can be severe.
In assessing whether the payment is connected with retirement rather than redundancy, HMRC will apply the statutory definition of redundancy under the Employment Rights Act 1996. The employer will need to demonstrate a clear and credible rationale for the redundancy decision — independent of any retirement consideration — and provide a reasoned explanation of how the termination payment was arrived at.
If you are approaching retirement age and are being offered a settlement agreement in a redundancy context, the agreement may benefit from amendment to seek to explicitly state the payment is made by reason of redundancy and not in anticipation of retirement. But his is not simply a matter of labelling. The best evidence is the documentation concerning the underlying factual picture — the genuine disappearance of a role, a fair selection process, and a payment calculated on redundancy principles. This may include redundancy letters and notice of redundancy. Tax advice should be sought alongside your employment law advice in these circumstances.
14. Tax Planning: Payments Exceeding £30,000 and Pension Contributions
Where the termination payment you are negotiating is likely to exceed £30,000, there may be scope for tax-efficient structuring — but this is an area where specialist financial and tax advice is essential. What follows is an outline of the key issues, not a substitute for that advice.
Payments Above £30,000
The first £30,000 of a qualifying termination payment is exempt from income tax under section 403 of ITEPA 2003, and no employee national insurance is payable on the entire qualifying amount. However, any amount above £30,000 is subject to income tax at your marginal rate, and employer Class 1A national insurance is payable on the excess.
For employees with long service or senior roles, the termination payments (including redundancy pay) often exceed the £30,000 threshold. Understanding in advance how the package will be taxed, and what your net receipt will actually be, is an important part of evaluating whether the offer is adequate.
Directing Part of the Termination Payment Into Your Pension
One strategy available in some circumstances is to ask the employer to pay part of the termination payment directly into your pension as an employer contribution, rather than paying it to you as cash. Where this is properly structured, the employer contribution is made without deduction of income tax or employer national insurance. The employee does not pay income tax or national insurance on that element either. Subject to certain conditions, this can produce a significantly better net outcome than receiving the same amount as a taxable cash payment above the £30,000 threshold.
For this to work, the pension scheme rules must permit employer contributions of this kind. The employee must also have sufficient annual allowance available — the annual allowance is currently £60,000 per tax year (for 2025/26), covering all pension inputs, though it is tapered for very high earners. Pension contributions made in this way count against the annual allowance, and if the allowance is exceeded, a tax charge arises that can offset or eliminate the benefit. If you have not made significant pension contributions in recent years, there may also be scope to carry forward unused allowance from the previous three tax years, potentially increasing the available headroom considerably.
This is genuinely valuable planning for the right employee in the right circumstances — but it requires careful, individualised advice from a financial adviser or tax specialist before any agreement is reached.
The PILON and PENP Problem — Why You Cannot Simply Sacrifice Notice Pay Into Pension
A question that sometimes arises in settlement negotiations is whether the employee can direct their payment in lieu of notice (PILON) into their pension, on the basis that this would make it tax-free. The answer is that this does not work, and understanding why requires a brief explanation of the Post-Employment Notice Pay (PENP) rules.
Since April 2018, the taxation of termination payments has been governed in part by the PENP rules under section 402B of ITEPA 2003. The PENP represents, broadly, the portion of a termination payment that is equivalent to the basic pay the employee would have received had they served their notice in full. PENP is always treated as earnings — it is fully subject to income tax and national insurance, regardless of how the payment is described or structured in the settlement agreement.
Crucially, the PENP calculation uses the employee’s pre-salary-sacrifice basic pay, not their reduced post-sacrifice salary. This means that if you participate in a salary sacrifice arrangement — including one under which you sacrifice salary in exchange for pension contributions — the PENP calculation is performed as if the sacrifice had not taken place. The effect is that the PENP figure, and the associated tax and national insurance liability, is based on your full pre-sacrifice salary.
The practical takeaway is this: directing part of a genuine ex gratia or compensation payment above the £30,000 threshold into pension can be a legitimate and tax-efficient step. Attempting to redirect PILON — which is earnings — into pension to avoid tax on it is a different matter and will usually create a PENP tax liability on the termination payment.
15. Training Fee Repayment
If you have undertaken employer-funded training in the period before your redundancy, your contract may contain a clause requiring you to repay some or all of those training costs if you leave within a specified period. These clauses are common, particularly where the employer has funded professional qualifications or specialist external courses, and the repayment obligation is typically structured on a sliding scale — a higher proportion repayable the sooner you leave after completing the training.
For employees facing redundancy, the general position in practice is more favourable than it might first appear. Most well-drafted training repayment clauses are framed as applying where the employee resigns or is dismissed for conduct reasons — not where employment is terminated by the employer for redundancy.
However, not all clauses are drafted equally. Check your employment contract or the applicable training agreement to see what it says.
16. The Reference
Redundancy is a neutral reason for leaving — it says nothing negative about your performance or conduct. The settlement agreement should ideally either contain an agreed reference or commit the employer to providing one. A standard agreed reference in a redundancy will confirm your job title, the dates of your employment, and ideally that your reason for leaving was redundancy. Anything less than this, or a refusal to commit to any reference wording, may be worth challenging. Our page on references in settlement agreements explains how agreed references work.
Legal Disclaimer
The contents of this article are intended to be for general information purposes only and do not amount to (nor are they intended to be) legal, tax or financial advice or a complete or authoritative statement of the law nor should they be treated as such. No warranty or promise is given, express or implied, as to accuracy of the information on this page and no liability is accepted for any error or omission. You should instruct a specialist employment solicitor to advise you on your particular situation and not act or rely on the information on this page.
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