Settlement Agreement Tax Calculator

How the calculator works

Every UK settlement package since April 2018 is taxed in a specific order:

1. PENP first. HMRC’s formula ((BP × D) ÷ P) − T from EIM13880. Chargeable to income tax as general earnings under section 402D ITEPA 2003. Does NOT benefit from the £30,000 threshold.
2. £30,000 threshold next. The remaining relevant termination awards (statutory redundancy + ex gratia) can use the £30,000 threshold under section 403.
3. Excess above £30,000 taxable. Any relevant termination awards above £30,000 are chargeable as earnings.
4. Earnings items throughout. Contractual PILON, holiday pay and contractual bonuses are earnings regardless of £30,000 threshold.
5. Employer NI on excess. Post-April 2020, employer Class 1A NI (15 per cent for 2025-26) is due on any relevant termination award above £30,000. Falls on the employer, not the employee.

Worked example

Rob is made redundant. Package: £8,000 statutory redundancy, £15,000 ex gratia, £0 PILON, £2,000 holiday pay. Basic pay £3,500 monthly, 30-day pay period, 90 days unworked notice.

• PENP: ((3,500 × 90) ÷ 30) − 0 = £10,500.
• PENP capped at total relevant termination awards (£23,000): stays at £10,500.
• Remaining relevant termination awards after PENP: £23,000 − £10,500 = £12,500. Fully within £30,000 threshold → tax-free.
• PILON: £0. Holiday: £2,000 (taxable). Bonus: £0.
• Total taxable: £10,500 PENP + £2,000 holiday = £12,500.
• Total tax-free: £12,500.
• Employer Class 1A NI: £0 (nothing above £30,000).

Related tools and guides

• PENP calculator — the standalone PENP formula tool.
• PILON calculator — for the PILON figure itself.
• Redundancy pay calculator — statutory redundancy on its own.
• Settlement agreement calculator — the gross package figure.
• PENP explained
• The £30,000 tax-free redundancy allowance explained
• PENP vs PILON
• PILON tax

Frequently asked questions

How is a UK settlement agreement taxed?

The correct order of operations: (1) Calculate PENP under section 402D — chargeable to income tax as general earnings, no £30k threshold. (2) Apply the £30,000 threshold under section 403 ITEPA 2003 to the remaining relevant termination awards (statutory redundancy + ex gratia). (3) Amounts above £30,000 are taxable as earnings. (4) PILON, holiday pay and contractual bonuses are earnings throughout. (5) Post-April 2020, employer Class 1A NI of 15 per cent (2025-26) is due on any amount above £30,000.

Does the £30,000 tax-free threshold include PILON?

No. PILON is chargeable to income tax as earnings and does not benefit from the £30,000 threshold in section 403. Only the genuine termination-award portion (statutory redundancy + qualifying ex gratia) benefits. PILON is calculated before the £30,000 threshold is applied.

What is PENP on my settlement letter?

Post-Employment Notice Pay — HMRC's formula ((BP × D) ÷ P) − T that determines how much of your termination package is taxed as general earnings. Applies to every settlement since April 2018 regardless of whether a PILON clause exists. Documented in EIM13880 and section 402D ITEPA 2003.

Is holiday pay in a settlement tax-free?

No. Accrued holiday pay is always chargeable to income tax and NI as earnings. It does not fall within the £30,000 threshold. Same treatment as PILON and contractual bonuses.

Should I take legal advice on the tax breakdown?

Yes. Section 203 ERA 1996 requires you to take independent legal advice on any settlement agreement before it binds you. Use that meeting to check the tax breakdown as well as the legal terms. Employer typically pays legal fees (usually £500-£1,500 + VAT).

This calculator estimates the tax treatment of a UK settlement package using HMRC’s PENP formula (EIM13880), the £30,000 threshold (section 403 ITEPA 2003) and post-April 2020 employer Class 1A NI rules. Estimate only, not tax advice. For your specific package take independent legal and tax advice before signing.