Last reviewed and updated: 12 May 2026
Calculating your settlement can be tricky because every situation is different. Unfortunately, we can’t punch in a few numbers into a settlement calculator to arrive at a definitive settlement figure. There are too many variables and contexts to produce a meaningful and reliable figure.
However, this guide has been written by a specialist employment solicitor to offer expert, actionable guidance on calculating a settlement, whether you’re being made redundant, you’re unfit to work, or you are facing a disciplinary or a performance improvement procedure.
Ready to start? Let’s do the maths. If you’d prefer to skip straight to the numbers, try our Redundancy Pay Calculator.
How to calculate your settlement agreement: step-by-step
1. Get your paperwork together
Get hold of all of the relevant paperwork so you can calculate your settlement. Use the checklist below.
Settlement agreement document checklist
- Last three months’ payslips.
- Employment contract.
- Form P60 (the tax summary your employer gives you at the end of each tax year).
- Form P11D – this will show the taxable value of any contractual benefits in kind, such as a company car.
- Bonus scheme or rules.
- Long-Term Incentive Plans (‘LTIPs’) or similar incentive scheme rules.
- Commission scheme rules.
- Pension information.
- Share options, or Save As You Earn scheme documents.
- Work/corporate gym membership terms.
- Redundancy policy (this may contain details about enhanced redundancy pay).
- Outplacement scheme (if your employer has this it may provide free or subsidised career support to help you find your next role).
- Ill-health benefits (if your settlement offer comes about because you are unfit to work).
- Any other contractual benefits.
2. Know your numbers
Once you’ve got everything together you’re in a great place to work out the values of your pay and benefits, on a gross and net basis (i.e. before and after tax). Double-check and recalculate the settlement numbers. Check your employer’s figures against yours. Go direct to payroll if you need to, and the pension provider. But be careful not to breach any instructions your employer has given, for example not to speak to anyone else. If that is the case, get permission first to be safe.
3. Check your notice entitlement
Some employers may just look at the employment contract and go off that. They may be mistaken about your start date. Check your start date and work out your statutory minimum notice entitlement – which is one week for each completed year of service up to a maximum of 12 weeks (section 86 Employment Rights Act 1996). Then check your written employment contract, if you have one, to see what that says. If it’s more than the statutory minimum, that’s your entitlement.
Unless you’re guilty of a serious act of misconduct that would entitle your employer to dismiss you without notice, the first thing to do is check you’re getting paid your full notice. Your employer may ask you to work your notice. If you’d prefer to leave sooner, this may be a negotiating point.
Summary: you should check (1) when you started; (2) how many complete years’ service you’ve got; (3) what your written employment contract says, if you’ve got one; and (4) when notice was properly served. If the contract says notice must be served in writing, and you were only told verbally, you may be able to argue notice has not yet been served.
Pay in lieu of notice (PILON) and benefits
Don’t forget the benefits you’ve lost (or will lose) if your employer pays in lieu. If your employer is ending your employment without giving you notice (or full notice) and instead paying you in lieu, income tax and national insurance should be deducted (like normal pay). The taxable element of a termination payment that reflects unworked notice — known as Post-Employment Notice Pay (PENP) — is calculated under section 402D of the Income Tax (Earnings and Pensions) Act 2003 and cannot benefit from the £30,000 termination payment exemption. See our guide on the tax treatment of settlement payments.
Find out whether you are getting to keep your contractual benefits during the period you would have been employed had you worked your notice, or alternatively, if you are being paid additional compensation for not getting those benefits during what would have been your notice period.
Add up your benefits, by looking at your last Form P11D, or check with payroll or the person in HR that deals with benefits and rewards. Extras like pension contributions, car allowances, private health cover, and gym membership can significantly add up. Try and secure their continuation or ask for an agreed payment equal to the value over the notice period.
Tip: some employment contracts may give the employer a right to end your employment without notice and only pay a payment in lieu of notice based on your basic pay.
4. Don’t forget holiday pay
You are entitled to be paid any holidays you’ve accrued but not taken, up to the termination date. The minimum statutory entitlement to paid leave is 5.6 weeks a year. If you work 5 days a week that’s 28 days (inclusive of bank holidays). But you may be contractually entitled to more – check your employment contract.
Some employees who work irregular hours, or employees on part-year contracts (e.g. term-time only), might have their holiday calculated as a percentage top-up rather than in days or weeks, in which case they should receive their holiday pay as a top-up each time they are normally paid.
Employee tip: if you’ve been prevented from taking your holidays by your employer, or you’ve been on long-term sick leave, you will likely be able to claim back-dated holidays, even if your employment contract says otherwise. Calculate your entitlement in days (i.e. accrued but untaken holidays) and speak to your solicitor about how far you may be able to backdate.
Redundancy
If you’re being made redundant, and you have two or more years’ service, you are entitled to at least the statutory minimum redundancy payment. The exact figure you are entitled to will depend on your length of service (in complete years’ service), your age and your weekly gross pay.
Statutory redundancy pay
Statutory redundancy pay is limited to 20 years’ service and a weekly pay cap, which is £751 if you are made redundant on or after 6 April 2026, giving a current maximum statutory redundancy payment of £22,530.
Important note: a statutory redundancy entitlement is payable in addition to your contractual or statutory minimum notice entitlement.
Employee tip: try our Redundancy Pay Calculator — it delivers both a capped and uncapped redundancy payment figure.
Contractual redundancy pay
If your employer has an enhanced redundancy scheme you should be able to calculate the amount you will receive by applying the scheme’s formula. If you’re not sure whether there is an enhanced scheme, or you think your employer has offered other employees an enhancement but not you, see if you can get some advice or intelligence from the trade union or employee representatives in place about custom and practice regarding redundancy payments.
Often, an enhanced scheme will be similar to the statutory formula but with improvements, for example disapplying the cap on years of service or weekly pay, or paying more weeks for each year of service than the statutory formula provides.
Employee tip: check your Staff Handbook for any redundancy policy.
Mutually Agreed Resignation Schemes (MARS)
If your employer is running a Mutually Agreed Resignation Scheme (MARS), the financial package may use a different formula again. MARS deals are common in the public sector and in larger organisations and are typically offered openly to a defined group of employees as an alternative to redundancy.
Sickness and ill-health
Permanent Health Insurance (PHI)
If you’ve been offered a settlement agreement because you’ve been sick and unable to work, check whether you’re entitled to Permanent Health Insurance (also known as income protection insurance or ‘PHI’). This kind of insurance is sometimes part of the benefits package you’re entitled to.
The purpose of PHI is to provide an income while you are unable to work. The terms of PHI policies vary. Some say you need to be unfit to do your own job; others say you need to be unfit for any work. They typically provide income protection at between 50% and 75% of your salary (and are intended for situations where an employee is unlikely to be able to work for a long time).
If you’ve been offered a settlement agreement you may be better off applying for PHI, if you are likely to be unfit to work for a while and you meet the policy requirements. PHI policies will cease to provide any benefits once someone ceases to be an employee. Pursuing PHI and accepting a termination payment under a settlement agreement will normally be mutually exclusive.
Employee tip: speak to your employment solicitor about your options and get hold of the insurance policy wording.
Critical illness insurance
Some employers provide critical illness cover. Generally, it will involve a lump sum payment if the employee is diagnosed with a serious condition, such as cancer. If you’ve got this benefit, get hold of the policy and speak to the insurer or broker. It has been known for employers to offer a settlement agreement without informing the employee they could have made a claim for critical illness benefits. Once your employment has ended under the settlement agreement you will usually lose any entitlement to claim.
Employee tip: if you have critical illness cover, speak to the insurer about whether you’re likely to be successful based on your health condition, and find out how much you could get and when and how you need to make a claim.
Ill-health retirement and ill-health pension benefits
Check whether you have these. Sometimes they are attached to your pension. Obtain the relevant policy or benefit wording. Much like PHI, these benefits can be extremely valuable and should not be given up by signing a settlement agreement without carefully weighing up the pros and cons. But be realistic as well – if your illness is not likely to be long-term, you may not fulfil the criteria to claim these benefits.
Poor performance
Sometimes, rather than going through a performance management procedure (or performance improvement plan, ‘PIP’), your employer (or you) may decide to offer a settlement agreement. If that happens, the value of your settlement may come down to the following factors.
Your notice entitlement
Even if you are dismissed for poor performance, unless you have been grossly negligent or guilty of gross misconduct, you will still be entitled to your contractual notice.
How long the process will take
If you have under two years’ service, your employer may decide simply to serve notice or terminate your employment immediately and pay in lieu. An employer may do this because — until the Employment Rights Act 2025’s changes to the unfair dismissal qualifying period are commenced (currently expected to take effect on 1 January 2027, reducing the qualifying period from two years to six months’ service) — an employee currently needs two years’ service to bring a claim for ordinary unfair dismissal.
If you have accrued a right not to be unfairly dismissed, the employer must follow a fair procedure if it wants to avoid losing an unfair dismissal claim. That would usually require an employer to give an employee reasonable time to improve, and issue at least a first written warning, then a final warning, before dismissing you. Typically, that could take a few months to complete.
Whether there is an underlying health condition that might be a disability
If there is, your employer will have added risks if it dismisses you for poor performance related to your disability. It will probably need to get medical evidence. If the disadvantage your disability causes could be reduced by making reasonable changes (‘reasonable adjustments’), not doing so would amount to disability discrimination. In these situations, your employer may be willing to increase the settlement to get the deal done, knowing otherwise it would have disability risks to contend with.
Your employer’s attitude to settlement
Employers are unlikely to overpay. If your employer is already incurring the cost of employing HR Managers, it may prefer to performance-manage you and see what happens: you either improve, or you don’t, in which case it dismisses you and pays you notice pay only.
Your position and attitude
Employers will often assess the individual employee. If you’ve got another job, are bound to get something quickly, are showing signs of wanting ‘out’, or you’ve made the first move and approached your employer, the chance of getting a higher settlement might diminish. If your employer has a track record for offering deals, then a quick early conversation may work in your favour even if you make the first approach. Think carefully about who you are negotiating with, and pick the best person to negotiate with if you have the choice.
Calculating the compromise
Settlement agreements were previously called compromise agreements. The name change occurred in July 2013 – and although the new term is perhaps clearer (after all, the purpose is to settle claims), there was a lot to be said for the old name. It reminded the parties that the spirit of doing a deal is to compromise, and that neither side is likely to get everything their way.
For the employee, there can be non-financial benefits to doing a deal – for example being released from post-termination restrictions – that might warrant taking less money. You may even lose the deal if you fight too hard (although that is rare). You may annoy your employer so much, or fight so hard, that you leave deep scars for the people the other side of the negotiation. That might not concern you, but if you’d prefer to leave on amicable terms, pushing for every last pound may not be worth it if you damage the relationship with colleagues forever. Factor in the chance that you may end up working with some of the same people in the future, as colleagues, customers or suppliers. In some industries, the chance of meeting each other again might be better than not.
Many of these conversations will take place on a ‘without prejudice’ basis, or as protected conversations under section 111A of the Employment Rights Act 1996. Acas provides general guidance on the settlement agreement process.
Pulling it all together
Ask yourself whether, factoring in financial and non-financial considerations, the financial deal is good enough to tide you over until you get another job – especially if you’re going to get outplacement support and you can secure an agreed reference as part of your settlement agreement. As they say, some things are worth more than money.
| Need help working out what you’re owed? |
| Use our free Redundancy Pay Calculator to get an instant capped and uncapped figure, or read our main Settlement Agreements guide for a full walk-through of how a settlement is put together. |
