What is a settlement agreement

What a settlement agreement is

The document exists as an exception to a prohibition. Section 203(1) of the Employment Rights Act 1996 makes void any provision in an agreement so far as it purports to exclude or limit the Act, or to stop someone bringing tribunal proceedings under it.

Section 203(2)(f) is the carve-out, and a settlement agreement does not have to end the job. Acas confirms one can be made with a worker, a former worker or a job applicant, and can settle a bonus dispute while employment continues. Great Britain called it a compromise agreement until 2013.

The six conditions in section 203

Section 203(3), which extends to England, Wales and Scotland, sets out what a valid agreement contains. All six conditions apply together, and one failure leaves the waiver void.

Condition	What section 203(3) requires
Written	The agreement is in writing
Specific	It relates to the particular proceedings
Advised	The employee took advice from a relevant independent adviser on the agreement’s terms and effect, and on tribunal rights
Insured	The adviser held insurance or a professional indemnity when the advice was given
Named	The agreement identifies the adviser
Declared	It states that the conditions regulating settlement agreements are satisfied

The wording of the waiver is not a formality. The note to paragraph 4 of the Acas Code says calling a document full and final settlement of all claims is not sufficient to contract out of tribunal claims, and that it has to state specifically which claims it covers.

Who counts as an independent adviser

Section 203(3A) lists four advisers, meaning a qualified lawyer, a certified and authorised trade union officer, official, employee or member, a certified and authorised advice centre worker, and a person specified by order.

In England and Wales a qualified lawyer means an authorised person under the Legal Services Act 2007 for a right of audience or the conduct of litigation. Section 203(3B) disqualifies anyone who is, is employed by, or is acting for the employer or an associated employer, and an advice centre worker whom the worker pays for the advice. That is why the sign-off goes to an outside firm, and why the usual checks on regulation and specialism apply.

Acas says the employer should consider offering to pay for that advice but does not have to. Where it does not, the cost falls on the worker at the firm’s hourly rate.

The 10 calendar days in the Acas Code

The Acas Code of Practice on settlement agreements was issued under section 199 of the Trade Union and Labour Relations (Consolidation) Act 1992 and took effect on 29 July 2013. Paragraph 12 says a minimum of 10 calendar days should generally be allowed to consider the written terms and take independent advice, unless the parties agree otherwise.

Its foreword states that failure to follow the Code does not by itself make a party liable and will not lead to an adjustment in any compensation award, though tribunals take it into account. The 25% adjustment in section 207A is reserved for a Code on dispute resolution procedure, which this is not.

Protected conversations under section 111A

Section 111A makes evidence of pre-termination negotiations inadmissible in an unfair dismissal complaint, meaning any offer or discussion before termination with a view to ending the employment on agreed terms.

Paragraph 7 of the Acas Code records the gaps. The protection does not reach automatically unfair reasons such as whistleblowing, union membership or asserting a statutory right, nor claims other than unfair dismissal, including discrimination, harassment, breach of contract and wrongful dismissal. Section 111A(4) cuts the protection back to what a tribunal considers just where behaviour was improper, and paragraph 18 counts withholding the 10 days as undue pressure, along with saying before any disciplinary process has begun that refusal means dismissal.

What the claim is worth in 2026-27

The ceiling resets each April. The Employment Rights (Increase of Limits) Order 2026 took effect on 6 April 2026 across England, Wales and Scotland.

Limit in Great Britain	From 6 April 2026	Before
Compensatory award, unfair dismissal	£123,543	£118,223
A week’s pay	£751	£719
Minimum basic award, some automatically unfair dismissals	£9,157	£8,763

Section 124(1ZA) caps the compensatory award on an unfair dismissal claim at the lower of £123,543 and 52 multiplied by a week’s pay. That second limb runs on actual pay, because section 227(1) applies the £751 ceiling to the basic award, the additional award and a redundancy payment, not to it. Section 124(1A) removes the cap where the dismissal is unfair by reason of health and safety or a protected disclosure.

Statutory redundancy pay sits outside that calculation, capped by gov.uk at £22,530 from 6 April 2026.

Two dated changes, 1 October 2026 and 1 January 2027

Both instruments below are made and commenced.

Rule	Position now	Changes to	On	Instrument
Unfair dismissal time limit	3 months	6 months	1 October 2026	S.I. 2026/954
Discrimination time limit	3 months	6 months	1 October 2026	S.I. 2026/954
Unfair dismissal qualifying period	2 years	6 months	1 January 2027	S.I. 2026/559
Compensatory award cap	£123,543	Repealed	1 January 2027	S.I. 2026/559

S.I. 2026/954 commences section 152 of and Schedule 12 to the Employment Rights Act 2025, and disapplies the longer limits where the relevant date falls before 1 October 2026. For unfair dismissal that relevant date is the effective date of termination.

S.I. 2026/559 applies the shorter qualifying period and the repeal of the cap where the effective date of termination falls on or after 1 January 2027, even where the dismissal happened before it. A settlement agreement fixes that date.

Discrimination claims and Equality Act section 147

A discrimination claim is not settled under section 203 at all. Section 144(1) of the Equality Act 2010 makes a contract term unenforceable so far as it purports to exclude or limit that Act, excepting a conciliated contract and a qualifying settlement agreement.

Section 147(3) sets six conditions mirroring section 203, with one drafting difference. It has to state that the advice and insurance conditions are met, rather than use the section 203 formula. An agreement covering a dismissal and a discrimination complaint must satisfy both statutes.

Tax and the £30,000 threshold

Section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 taxes a termination payment as employment income to the extent it exceeds £30,000. It carries a UK extent, so the threshold is identical in all three jurisdictions.

Element of the payment	Tax and National Insurance
Statutory redundancy, enhanced redundancy or severance, non-cash benefits	Free up to a combined £30,000, taxed above it
Unpaid wages, holiday pay, bonuses	Taxed as earnings in full
Pay in lieu of notice, contractual or not	Taxed as earnings in full
Payment for agreeing a restrictive covenant	Taxed as earnings in full
Employer contribution to a registered pension scheme	None, subject to the Annual Allowance
Legal costs paid direct to the worker’s solicitor	None
Payment made because injury or illness ends the job	None

gov.uk adds that the employer pays Class 1A National Insurance above the combined £30,000, and that a payment made after the P45 is taxed on an 0T code, assuming the personal allowance is used up.

What a confidentiality clause cannot cover

Acas states that confidentiality clauses are voluntary, and that an employer cannot use one to stop a worker whistleblowing, reporting a crime to the police, or sharing information about a crime to get support as a victim in England or Wales.

Section 43J voids any provision purporting to preclude a protected disclosure, including in an agreement to refrain from proceedings, and from 6 April 2026 sexual harassment is a qualifying disclosure in its own right, meaning harassment of the kind described in section 26(2) of the Equality Act 2010.

In England and Wales, section 17 of the Victims and Prisoners Act 2024 has been fully in force since 1 October 2025 and voids a clause blocking a victim’s disclosure to law enforcement, a lawyer, a regulator or a support service, though not one aimed at publishing it. The wider ban, section 202A of the 1996 Act, is commenced only for the purpose of making regulations and is not yet law.

Settlement agreement or Acas COT3

Section 203(2)(e) is a second carve-out, for an agreement reached where an Acas conciliation officer has acted under sections 18A to 18C of the Employment Tribunals Act 1996. It carries no independent adviser condition, and the Acas Code does not apply, so neither do the 10 calendar days.

Acas records that settlement as a COT3, binding once both sides agree, even unsigned. Early conciliation comes first, and since 1 December 2025 it runs up to 12 weeks in Great Britain, with section 207B stopping the limitation clock. Unpaid, a COT3 is enforced through the same penalty and naming scheme as a tribunal award.

Settlement agreements in Scotland and Northern Ireland

Employment law is reserved, so section 203, the Equality Act and the Acas Code apply in Scotland unchanged and the 2026-27 limits extend there. Four things differ. A qualified lawyer in Scotland is an advocate or a solicitor holding a practising certificate, not a Legal Services Act 2007 authorised person. An unpaid Acas settlement is enforced by a sheriff officer through a sheriff court, not the England and Wales fast track. And income tax is devolved, so the slice above £30,000 is taxed at Scottish rates, sharpest between £43,663 and £50,270, where the rate is 42% against 20% elsewhere in the UK. The regulator is the Law Society of Scotland, with service complaints going to the Scottish Legal Complaints Commission rather than the Legal Ombudsman.

Northern Ireland is a separate statute with different figures.

	Great Britain	Northern Ireland
Name in the statute	Settlement agreement	Compromise agreement
Governing provision	ERA 1996 section 203	1996 Order article 245
Qualified lawyer	Legal Services Act 2007 authorised person, in Scotland an advocate or practising solicitor	Barrister, or solicitor with a practising certificate
Qualifying period	2 years, 6 months from 1 January 2027	1 year
Time limit	3 months, 6 months from 1 October 2026	3 months, unchanged
A week’s pay	£751	£783
Compensatory award cap	£123,543	£123,785
Minimum basic award	£9,157	£9,512
Conciliation body	Acas, up to 12 weeks	Labour Relations Agency, up to 1 month

Those limits come from S.R. 2026 No. 57, in operation from 6 April 2026 and uprated on the retail prices index. Article 140(1) keeps the one-year service bar, and the six-month time limit does not reach Northern Ireland, because Schedule 12 to the 2025 Act does not amend the 1996 Order. Conciliation runs through the Labour Relations Agency for up to one calendar month, the Fair Employment Tribunal hears unlawful political or religious discrimination, and the firms on the Belfast list are regulated by the Law Society of Northern Ireland.