Settlement Agreements

Settlement Agreements

21st August 2020

Since the outbreak of the coronavirus pandemic our employment department has been very busy and we have seen a significant increase in the amount of settlement agreements being offered to employees or indeed employers considering whether they wish to offer the same.

There are several questions that come up often, one of which is payment during the notice period.

Payment in Lieu of Notice

Any settlement agreement should provide that an employee is entitled to their normal pay and benefits up to and including the termination date.  Quite often an employer will offer an employee a payment in lieu of notice, commonly abbreviated to PILON which means that their employment will terminate with immediate effect from the termination date and the contractual notice pay will be paid in a lump sum, with the employee not being required to work any notice period.

Any payment in relation to a payment in lieu of notice is subject to normal PAYE deductions.

Termination Payments

These most often relate to a payment that is made in consideration for an employee entering into a settlement agreement and does not relate to any contractual entitlement, such as accrued but untaken holiday or notice pay.  Any “ex gratia” payment is normally not subject to the usual PAYE deductions up to the sum of £30,000.

It is very important within a settlement agreement that payments are split between ones that relate to post-employment payment (notice pay) and those which are not as they attract different tax rules.

If you require any employment assistance, Kerry Hudson will be pleased to assist you. You can contact Kerry at or on 024 7653 1532