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Home›UK›Settlement Agreement Calculator

Settlement Agreement Calculator

Calculate the tax on your UK settlement agreement for 2025/26. See how PENP affects your payment, which parts are tax-free up to £30,000, and the net amount you take home after income tax and National Insurance.

Calculate PENP, tax-free portion, and total tax on your settlement agreement
£
The total gross amount offered in your settlement agreement
months
Your notice period per your employment contract
£
Your annual basic pay (used for PENP calculation and tax rate)
Whether you are working any of your notice period
£
If applicable. Counts within the £30,000 tax-free exemption.
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How to Use This Calculator

Settlement Tax tab

Enter your total settlement amount, contractual notice period (in months), annual salary, and whether you are working your notice. The calculator applies the HMRC PENP formula to determine the taxable notice element, then splits the remaining compensation at the £30,000 threshold to show your total tax and net payment.

Taxable vs Tax-Free tab

Enter each component of your settlement agreement separately: compensation, PILON, holiday pay, bonus, injury to feelings, legal fees, and restrictive covenant. The calculator shows a colour-coded breakdown — green for tax-free, red for taxable — so you can see exactly how each component is treated.

Negotiation Guide tab

Enter your annual salary to see how much you actually keep at different gross settlement levels (£20K, £30K, £40K, £50K, £75K, £100K). The guide shows the marginal value of each extra £1,000 above £30,000 and what each pound costs your employer after Class 1A NI.

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The Formula

Settlement agreement tax follows the HMRC rules for termination payments under s401-s403 ITEPA 2003:

Step 1: Calculate PENP (Post-Employment Notice Pay)
PENP = (BP / P) × D − T

BP = basic pay in last pay period before termination
P = days in last pay period (30.42 for monthly-paid employees)
D = calendar days of unworked notice
T = payments already taxed as earnings

PENP is fully taxable as earnings: income tax + employee NI

Step 2: Apply the £30,000 exemption
Compensation = Total Settlement − PENP − Contractual Payments
Tax-Free = first £30,000 of compensation
Taxable Excess = compensation − £30,000
Income Tax on excess = taxable excess at marginal rate (20% / 40% / 45%)
Employee NI on excess = £0 (exempt)

Employer cost:
Class 1A NI = 15% of compensation excess above £30,000

Since April 2018, all PILON is treated as taxable earnings via the PENP rules, regardless of whether a PILON clause exists in your contract. The PENP calculation uses the 30.42-day divisor (365 / 12) for monthly-paid employees, introduced from 6 April 2021 to prevent outcomes varying by month length.

Contractual payments (holiday pay, bonus, commission) and restrictive covenant payments (since April 2020) are always fully taxable as earnings with both income tax and employee NI.

Example

James — Marketing Manager, 38, Leeds

James earns £48,000/year and has 3 months' contractual notice. His employer offers a settlement agreement of £45,000 to leave immediately (not working notice), plus £1,200 accrued holiday pay and £500 towards his legal fees.

Settlement Tax tab

Total settlement£45,000
Notice period3 months
Annual salary£48,000
Notice workedNone
PENP (3 months unworked)£12,000 (fully taxable)
Compensation element£33,000
Tax-free (first £30,000)£30,000
Taxable excess£3,000
Income tax on PENP£2,400
Employee NI on PENP£960
Income tax on excess£600
Total deductions£3,960
Net settlement£41,040

James's PENP of £12,000 (3 months' basic pay) is taxed as earnings. Of the remaining £33,000 compensation, £30,000 is tax-free and £3,000 is taxed at his marginal rate of 20%. The holiday pay (£1,200) and legal fees (£500) are handled separately. James takes home approximately £41,040 from the £45,000 settlement.

Taxable vs Tax-Free tab

Looking at the full picture including holiday pay and legal fees:

Compensation (tax-free, under £30K)£30,000 — tax-free
Compensation (excess above £30K)£3,000 — income tax only
PILON / notice pay£12,000 — income tax + NI
Holiday pay£1,200 — income tax + NI
Legal fees (to solicitor)£500 — tax-free

FAQ

The first £30,000 of a termination or compensation payment in a settlement agreement is tax-free. Any amount above £30,000 is subject to income tax at your marginal rate but NOT employee National Insurance. Your employer pays Class 1A NI (15%) on the excess. However, PILON (notice pay), holiday pay, bonuses, and restrictive covenant payments are always fully taxable as earnings with both income tax and employee NI. Legal fees paid by the employer directly to your solicitor are tax-free.
PENP (Post-Employment Notice Pay) is a tax calculation under s402D ITEPA 2003 that determines how much of your settlement relates to unworked notice. Since April 2018, PENP is always fully taxable as earnings — you pay both income tax and employee National Insurance. PENP is calculated as (basic pay / 30.42) × unworked notice days. This amount is removed from the settlement before applying the £30,000 tax-free exemption to the remaining compensation element.
Yes. The £30,000 tax-free threshold for termination payments remains unchanged for the 2025/26 tax year. This exemption applies to the compensation element of a settlement agreement after PENP has been removed. Statutory redundancy pay counts within this £30,000 exemption. The threshold has not been increased since it was set and there are no announced plans to change it.
Yes. Since April 2020, all payments for entering into restrictive covenants (such as non-compete or non-solicitation clauses) are fully taxable as earnings. You pay both income tax and employee National Insurance on the full amount. This applies even if the covenant is part of your settlement agreement. Previously these payments could benefit from the £30,000 exemption, but this loophole was closed.
The most effective strategy is to ask your employer to pay the excess above £30,000 directly into your workplace pension as an employer pension contribution. This is generally tax-free (subject to the annual allowance of £60,000). For example, if your settlement is £50,000, you could take £30,000 tax-free and have the remaining £20,000 paid into your pension, saving up to £8,000 in income tax. Discuss this with your employer and solicitor before signing the agreement. Your employer also saves on Class 1A NI (15%) on the amount redirected to pension.

Related Calculators

Redundancy Pay Calculator
Calculate statutory redundancy pay and tax on payments above £30,000.
Income Tax Calculator
Calculate your UK income tax and see your marginal rate for 2025/26.
National Insurance Calculator
Work out employee and employer NI contributions for the tax year.
Take Home Pay Calculator
See your net pay after tax and NI deductions from your salary.
Notice Period Calculator
Calculate your statutory and contractual notice period entitlement.
Pension Calculator
Plan pension contributions, including redirecting settlement excess to save tax.

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