A settlement agreement payment calculator is a useful tool in understanding how much you may need to pay a specific employee if you entered into a settlement agreement with them. However, for such tools to be genuinely useful, you need to know how to use them properly. If you miss a component, undervalue a risk, or misapply the tax rules, your opening offer will either cost you more than it should or fail to land at all.
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The Figures You May Need To Enter Into A Settlement Agreement Payment Calculator
• Statutory Redundancy Pay
Where the termination has a redundancy aspect, statutory redundancy pay forms the base layer of the settlement calculation. It is calculated using a formula that takes into account the employee’s age, weekly pay, and length of service, applied across three age bands. For each year of service where the employee was under 22, they receive half a week’s pay. For each year aged between 22 and 40, they receive one week’s pay. For each year aged 41 or over, they receive one and a half weeks’ pay. Service beyond 20 years is disregarded.
The weekly pay used in this calculation is subject to a statutory cap, which the government revises periodically. Statutory redundancy pay sits within the tax-free threshold that applies to termination payments, which is one of the reasons it is worth structuring the settlement carefully. We can help you work through the redundancy calculation correctly, particularly where service spans multiple age brackets or where the employee disputes the figures.
• Notice Pay
When an employee leaves without working their full notice period, the pay they would have earned during that unworked notice is known as Post-Employment Notice Pay, or PENP. Since April 2018, PENP has been taxable. It makes no difference whether the contract contains a payment in lieu of notice clause or not. That element of the settlement must go through payroll, with income tax and National Insurance deducted, before any remaining payment can benefit from the tax-free threshold.
This matters because some employers assume that wrapping everything into a single settlement payment automatically shields it from tax. It does not. PENP must be identified, separated out, and taxed correctly. Any error in that calculation can result in an HMRC liability that surfaces after the agreement has been signed and the employee has moved on. We can help you work through the PENP calculation accurately and structure the overall payment so that the tax treatment is right from the start.
• The Ex Gratia Payment And The Tax-Free Threshold
The ex gratia element is the discretionary sum you offer the employee as compensation for signing away their right to bring tribunal claims. It is not something they are automatically entitled to, and the amount is entirely negotiable, but it needs to be pitched at a level that makes signing financially sensible for the employee.
• Accrued Holiday Pay
Accrued annual leave must always be paid out on termination, regardless of whether the departure is by agreement or not. It is treated as normal earnings and subject to income tax and National Insurance in the usual way.
A common mistake in settlement negotiations is failing to calculate accrued holiday accurately, particularly where the employee has had an extended period of garden leave, worked irregular hours, or has a leave year that does not run from January to January. Disputes about holiday entitlement can undermine an otherwise straightforward settlement. We can help you calculate the correct figure and ensure it is itemised clearly in the agreement.
• Compensation For Potential Claims
The ex gratia payment you offer needs to reflect the realistic value of the claims the employee is giving up. For unfair dismissal, compensation is subject to statutory caps that are updated each April. For discrimination claims, there is no statutory cap at all, and awards can run to significantly higher figures where injury to feelings or personal injury elements are involved.
Assessing claim risk requires honest analysis of the facts. You need to consider how credible the employee’s case is, how strong your defence is, and what a tribunal would likely make of the circumstances. A realistic claim value, discounted for litigation risk on both sides, gives you a defensible ex gratia figure. Pitching it modestly above what the employee might recover at tribunal, net of legal costs and the stress of the process, is usually a reasonable starting point. We can help you carry out that risk assessment properly before you commit to a figure.
• Additional Payments
Depending on the employee’s contract, there may be other payments you need to make. Outstanding bonus payments or commission, share option vesting, company car arrangements, and pension contributions are all capable of forming part of the settlement.
At GAP HR, we are HR and employment law specialists. We can help you calculate a settlement sum and negotiate a settlement agreement that achieves your goals and protects your business interests.
Call us now on 01491 598 600 or Click Here to Make An Enquiry and we will be delighted to help you.
