There is no fixed figure, but a reasonable settlement agreement typically starts from your statutory or contractual notice pay plus any owed salary, holiday and bonus, then adds a compensation ("ex gratia") sum, often the equivalent of one to six months' gross pay, depending on the strength of your potential claims and how long you have worked there. The right number for you depends on the specific facts.

If you have been handed a settlement agreement, or your employer has hinted one is coming, the first question on your mind is almost always the same: is this offer any good? This guide walks through how these payouts are actually built up, what counts as reasonable, and how to sanity check the figure before you sign.

Deen & Co are employment settlement agreement specialists. Your employer will usually contribute towards the cost of getting your agreement reviewed. See our fees.

What goes into the number

A settlement figure is not one lump sum plucked from the air. It is built from separate elements, and understanding them is how you tell a strong offer from a weak one:

Notice pay: what you would have earned during your notice period (contractual or statutory). This is money you are owed either way, so it should not count as the compensation part of the deal.
Accrued but untaken holiday: paid up to your leaving date.
Outstanding salary, bonus or commission: anything already earned.
Statutory redundancy pay (if the situation is a redundancy): a legal minimum based on age, weekly pay and length of service.
The ex gratia or compensation payment: the genuinely negotiable part. This is the sum the employer pays on top to persuade you to waive your right to bring claims. This is where the real negotiation happens.

When people ask how much they should get, they usually mean how big the compensation payment should be, because everything else is money you are broadly entitled to anyway.

What counts as a reasonable compensation payment?

There is no legal formula, but as a rough industry benchmark the ex gratia element often lands somewhere between one and six months' gross salary. Where you sit in that range depends on:

The strength of your legal claims. A weak or non existent claim gives you little leverage. A strong unfair dismissal, discrimination or whistleblowing claim gives you a lot. The employer is effectively buying certainty, and the stronger your case, the more that certainty is worth to them.
Length of service. Longer service usually means a higher potential tribunal award and more goodwill.
How quickly you will find comparable work. Longer expected time out of work strengthens your position.
The employer's motivation. An employer who wants you gone quickly and quietly will pay more for a clean exit.
Your salary and seniority. Senior roles with restrictive covenants and complex packages tend to settle higher.

A useful reference point: if you would have a genuine unfair dismissal claim, a tribunal can award a basic award (calculated like statutory redundancy) plus a compensatory award for lost earnings. A reasonable settlement often reflects a discounted version of what you might realistically win at tribunal, discounted because settling removes the risk, cost and delay of litigation for both sides.

A worked example

Say you earn £48,000 a year (£4,000 a month gross), have three years' service, and a reasonable notice period of three months. Your employer offers a settlement to avoid a performance process you believe is unfair:

Notice pay (three months): £12,000
Accrued holiday: £900
Outstanding salary to leaving date: £1,500
Ex gratia compensation: £14,000 (roughly 3.5 months' pay)
Headline total: £28,400

Here, the reasonable test is really about that £14,000 compensation figure. Given a plausible unfair dismissal angle and three years' service, that is a credible starting point, and there may be room to negotiate it upward. Note too that the first £30,000 of the genuine compensation element can usually be paid tax free, while notice pay, salary and holiday are taxed as normal, which changes what actually lands in your bank account. We cover this fully in Settlement Agreement Tax.

Why settlement agreement calculators only get you halfway

Search for a settlement agreement calculator and you will find tools that estimate a figure from your salary, age and service. They are a useful gut check. They will tell you roughly what your statutory redundancy and notice come to, and give a ballpark for the compensation element.

But a calculator cannot see the thing that actually drives the number: the strength of your legal position. Two people on identical salaries can walk away with wildly different sums because one has a strong discrimination claim and the other has none. A calculator treats you as a set of numbers. A negotiation treats you as a risk the employer wants to remove. Use a calculator to set expectations, then get the offer reviewed to find the leverage the calculator cannot measure.

How to check whether your offer is fair

Before you respond to any offer:

Separate the elements. Work out how much is money you are owed anyway (notice, salary, holiday) versus genuine new compensation. A generous looking offer that is mostly notice pay may not be generous at all.
Assess your claims honestly. Do you have a realistic claim for unfair dismissal, discrimination, or something else? That is your leverage.
Check the tax treatment. Make sure the compensation element is structured to use the £30,000 tax free allowance where it genuinely applies.
Read the restrictions. Post termination restrictions, confidentiality and non disparagement clauses have value, so do not give them away for free.
Get it reviewed. A settlement agreement is not legally binding unless you have taken advice from an independent adviser, so a review is required anyway, and it is usually funded by your employer.

The bottom line

A reasonable settlement agreement fully covers what you are owed and adds a compensation payment that reflects the real strength of your claims, commonly one to six months' pay, but sometimes far more. Do not anchor on the headline number. Anchor on the negotiable compensation element and the leverage behind it.

Ready to check your offer? Deen & Co's employment solicitors review settlement agreements every day, and your employer usually pays our fee. Get in touch for a free, no obligation chat.

FAQ

How much is the average settlement agreement in the UK? There is no official average. Figures range from a few thousand pounds to well over a year's salary. The compensation element commonly falls between one and six months' gross pay, driven by the strength of your potential claims and your length of service.

Is a settlement agreement payment tax free? The genuine compensation (ex gratia) element is usually tax free up to £30,000. Notice pay, salary, holiday pay and bonuses are taxed as normal earnings. See our full tax guide.

Can I negotiate a higher settlement figure? Yes. Most initial offers have room to move, especially where you have credible legal claims. Having a solicitor negotiate on your behalf typically improves the outcome.

This article is general information, not legal advice. For advice on your specific situation, speak to a qualified employment solicitor.

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