Comparison · Employment · 2026
Settlement Agreement vs Redundancy Pay UK 2026: Tax and Value Compared
Statutory redundancy pay is a fixed legal minimum, while a settlement agreement is a negotiated exit package that typically pays more in exchange for waiving your right to bring employment claims. Both can benefit from the same £30,000 tax-free threshold. Here is how they compare in 2026.
TL;DR - 30-Second Summary
- - Statutory redundancy pay: fixed legal minimum, capped at £21,570 (20 years x 1.5 weeks x £719 cap), automatic entitlement
- - Settlement agreement: negotiated, usually higher, requires waiving legal claims, needs independent legal advice to be valid
- - Tax: both share the same £30,000 combined tax-free threshold on genuine termination payments
Side by Side: Settlement Agreement vs Redundancy Pay
| Feature | Statutory Redundancy Pay | Settlement Agreement |
|---|---|---|
| How it's set | Fixed statutory formula | Negotiated between employer and employee |
| Maximum weekly pay used | £719 (2026/27 cap) | No cap — negotiable |
| Waives legal claims | No, you keep the right to claim | Yes, condition of the payment |
| Legal advice required | Not required | Mandatory for validity |
| Tax-free threshold | First £30,000 combined with other termination pay | Same £30,000 combined threshold |
| Typical total value | Lowest — statutory minimum only | Usually higher — includes ex-gratia enhancement |
How Statutory Redundancy Pay Works
Statutory redundancy pay applies automatically when your role is made genuinely redundant and you have at least 2 years' continuous service. It is calculated using: half a week's pay per full year of service under age 22, one week's pay per full year aged 22-40, and one and a half week's pay per full year aged 41 and over, capped at 20 years of service and a weekly pay cap of £719 for 2026/27 (maximum statutory redundancy pay: £21,570).
You are entitled to this regardless of whether you sign anything, and it does not require you to waive any legal rights.
How Settlement Agreements Work
A settlement agreement is a legal contract, usually offered when an employer wants certainty about ending the employment relationship without risk of a future tribunal claim. In exchange for an enhanced payment (which usually includes at least the statutory redundancy entitlement plus an additional ex-gratia sum), you agree to waive your right to bring most types of employment claim.
It is only legally valid once you have taken independent legal advice from a qualified solicitor, which your employer typically contributes towards (commonly £350-£750 plus VAT).
Tax Treatment in 2026/27
The first £30,000 of a genuine termination payment — combining statutory redundancy pay and any ex-gratia settlement enhancement — is free of income tax, and generally free of employee National Insurance too. Any amount above £30,000 is subject to income tax at your marginal rate, and employer Class 1A National Insurance applies to the excess above £30,000.
Payments in lieu of notice (PILON), holiday pay and any contractual bonus are normally taxed as earnings in full and do not benefit from the £30,000 exemption, even when paid as part of a settlement agreement.
Who Should Consider What?
- - Your role is genuinely redundant with no dispute
- - You want to keep the option to bring a future claim
- - No settlement agreement has been offered
- - You believe you may have a claim (e.g. unfair dismissal, discrimination)
- - You want a higher payment and a clean, agreed exit
- - Your employer has offered enhanced terms plus legal fee contribution