Is a settlement agreement payment tax free up to GBP 30,000?

Full answer

When you leave a job under a settlement agreement (formerly a compromise agreement), the payment is usually split into two parts for tax purposes, and only one part can benefit from the GBP 30,000 exemption. The tax-free element applies to genuine ex-gratia termination or redundancy compensation - money paid because your employment is ending, not money you were already owed. The first GBP 30,000 of this is free of Income Tax and National Insurance. Amounts above GBP 30,000 are taxed as employment income at your marginal rate: 20% in the basic band (gross income to GBP 50,270 in 2026/27), 40% in the higher band (to GBP 125,140), and 45% above that. Employee NI does not apply to the excess termination payment, but employer NI at 15% can. The fully taxable part includes anything contractual: notice pay (PILON is taxed under the post-employment notice pay rules), unpaid salary, accrued holiday, and any bonus. These attract both Income Tax and employee NI at 8% up to GBP 50,270 then 2%. Worked example: you receive GBP 45,000 described as compensation for loss of office. The first GBP 30,000 is tax free; the remaining GBP 15,000 is taxed as income. If that GBP 15,000 sits in your higher-rate band, you pay 40% (GBP 6,000), leaving GBP 9,000 net from that slice. Who this affects: employees being made redundant or leaving under negotiated terms. You should always take independent legal advice, which the employer usually funds, as a settlement agreement is only valid with it. 2026/27 note: the GBP 30,000 threshold has been fixed for many years and is not indexed. To estimate the tax on the excess and on contractual elements, run the figures through an income tax or take-home pay calculator.

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