Settlement Agreements

It depends on what the payments are for. Payments due under your contract of employment such as notice pay, regular salary and holiday pay are subject to tax and National Insurance deductions.

However, compensation for loss of employment and redundancy pay aren’t subject to tax normally. Termination payments (outside your contract) generally are tax-free and NI free up to £30,000.

It is entirely possible for both parties to mutually terminate a settlement agreement; they may want some formalities like signing a deed of termination.

However, both parties would need to consider what terminating the Settlement agreement would mean. Does the employee return to work and pay back the termination payment? What about the tax already paid? What about any claims the employee has against the employer – could they now bring them in the Tribunal?

A Settlement Agreement doesn’t need to be witnessed, however under the Employment Rights Act 1996 an employee must seek legal advice and the advisor must be identified in the agreement before it can be effective.

Also, if the agreement is a special type of contract – a deed – there are special requirements including needing the agreement to be witnessed.

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