Settlement Agreement Calculator — Discovery Notes

JTBD

“How much tax will I pay on my settlement agreement?” / “What’s the difference between PENP and compensation?” / “How much is my settlement actually worth after tax?” / “Should I negotiate for more — what’s each extra £1,000 worth above £30K?”

Target Audience

• Employees who have been offered a settlement agreement and need to understand the net value before signing
• Employment solicitors advising clients on the tax implications of a proposed settlement figure
• HR professionals drafting settlement agreements who need to explain the tax treatment to departing employees
• Employees facing redundancy who want to understand the difference between a redundancy package and a settlement agreement
• Trade union representatives negotiating on behalf of members and needing a quick, shareable calculation

Three Tabs Described

Tab 1: Settlement Tax

The core calculator. User enters total settlement amount, contractual notice period (months), annual salary, and whether they are working notice. The calculator applies the PENP formula (s402D ITEPA 2003) to determine the taxable notice element, subtracts it from the total, then applies the £30,000 exemption to the compensation remainder. Output shows: PENP amount, income tax and employee NI on PENP, tax-free compensation portion, taxable excess, income tax on excess, employer Class 1A NI (for reference), total deductions, and net payment. Optional input for statutory redundancy (counts within £30K exemption).

Tab 2: Taxable vs Tax-Free

Component-by-component breakdown with visual traffic light coding. User enters each element separately: compensation, PILON, holiday pay, bonus/commission, injury to feelings, legal fees, and restrictive covenant. Each component is colour-coded green (tax-free) or red (taxable) with the specific tax treatment noted. This tab serves both informational intent (“which parts are taxable?”) and practical intent (“what’s my total net?”). The multi-component view is the most shareable tab — solicitors can send it to clients to explain exactly how each line item is taxed.

Tab 3: Negotiation Guide

Single input: annual salary. Output shows a table of net take-home amounts at £20K, £30K, £40K, £50K, £75K, and £100K gross settlement levels. For each level above £30K, the calculator shows the marginal value of each extra £1,000 (approximately £580-800 depending on tax band). Also shows the employer’s perspective: each £1,000 above £30K costs the employer £1,150 (including 15% Class 1A NI). This tab targets the negotiation intent — users actively deciding whether to push for more money.

Key Data — Verified from HMRC and gov.uk (March 2026)

£30,000 Tax-Free Threshold

• First £30,000 of termination/compensation payment is tax-free under s401-s403 ITEPA 2003
• Applies to ex-gratia payments, compensation for loss of office
• Statutory redundancy counts within this £30,000 (not additional to it)
• Unchanged for 2025/26 tax year
• Source: HMRC EIM13505

PENP — Post-Employment Notice Pay (from April 2018)

• Calculated under s402D ITEPA 2003
• Formula: PENP = (BP / P) x D - T
• BP = basic pay in last pay period (excludes overtime, bonus, commission, benefits)
• P = days in last pay period (30.42 for monthly-paid employees, per s402D(6) from April 2021)
• D = calendar days of unworked notice
• T = taxable termination payments already received
• PENP is fully taxable as earnings: income tax + employee Class 1 NI
• Does NOT benefit from the £30,000 exemption
• Source: HMRC EIM13876-EIM13896

Compensation Above £30,000

• Subject to income tax at marginal rate (20% / 40% / 45%)
• NOT subject to employee National Insurance
• Employer pays Class 1A NI at 15% on the excess
• Source: gov.uk/termination-payments-and-tax-when-you-leave-a-job

Contractual Payments — Always Fully Taxable

• PILON: fully taxable as earnings (income tax + employee NI) since April 2018
• Holiday pay: fully taxable as earnings
• Bonus / commission: fully taxable as earnings
• Source: HMRC EIM13874

Restrictive Covenant Payments

• Fully taxable as earnings since April 2020
• Income tax + employee NI apply
• Previously could be sheltered within £30,000 exemption — no longer
• Source: s225A ITEPA 2003

Injury to Feelings

• Generally tax-free if arising from genuine discrimination not connected to termination
• If connected to termination, falls within the £30,000 exemption
• Complex area — Mathur v HMRC case established key distinctions
• HMRC may challenge the tax-free treatment if they consider it connected to termination
• Source: HMRC EIM13530

Legal Fees

• Tax-free when employer pays directly to the employee’s solicitor
• Must be for advice on the settlement agreement itself
• Source: s413A ITEPA 2003

UK 2025/26 Income Tax Bands

UK 2025/26 Employee NI Rates

Employer Class 1A NI on Termination Excess

• Rate: 15% (from April 2025)
• Applies to compensation/termination payments above £30,000
• Paid by employer, not deducted from employee’s payment
• Source: gov.uk/guidance/rates-and-thresholds-for-employers-2025-to-2026

SEO Potential

• Keyword: “settlement agreement calculator” — high commercial intent, moderate-high volume
• Keyword: “settlement agreement tax calculator UK” — very specific, high conversion intent
• Keyword: “how much tax on settlement agreement” — informational intent, content-rich
• Keyword: “PENP calculation settlement agreement” — technical, low volume but very high intent
• Keyword: “settlement agreement tax free” — informational, mid volume
• Related: “settlement agreement pension” — strategy content opportunity

Cross-Linking Strategy

• /uk/redundancy-pay-calculator — many settlement agreements include redundancy
• /uk/income-tax-calculator — understand marginal tax rate
• /uk/national-insurance-calculator — understand NI on earnings components
• /uk/take-home-pay-calculator — compare regular salary vs settlement
• /uk/notice-period-calculator — understand notice entitlement for PENP
• /uk/pension-calculator — pension contribution strategy for tax savings