Settlement agreement: counterproposal

A "without prejudice and subject to contract" counter-offer in response to a draft settlement agreement, negotiating the payment, the reference, the tax-free element, and ancillary terms.

Draft template. This letter is being reviewed by a regulated solicitor before publication. You can use it now as a starting point, but read the surrounding guide carefully and consider getting free legal advice before sending.
Tax caveat (2026-06-15): Post-Employment Notice Pay (PENP) is fully taxable under Finance (No.2) Act 2017 regardless of the £30,000 tax-free threshold for termination payments. If the proposed settlement includes any element paid in lieu of notice, that portion must be excluded from the "tax-free portion" calculation. Get specialist tax advice on the split before finalising the figure.

You must take independent legal advice on the agreement before signing — this is a statutory condition of its validity under section 203(3) ERA 1996. Many employers contribute £350–£750 + VAT to the legal fees; ask for it explicitly.

This letter is "without prejudice" and "subject to contract" — labelling it clearly is important so it cannot be referred to in tribunal if no agreement is reached.

The market value of a settlement agreement is rarely the same as the first offer. Solicitors negotiating routinely uplift 25–100%. Key levers: strength of unfair dismissal / discrimination claim, length of service, age, time to find equivalent work, reputational value of mutual non-disparagement, value of a positive reference, tax treatment.

Do not sign anything in haste. The employer is required to give you a reasonable time to consider — at least 10 calendar days under the Acas guide is recommended.

AI cross-check (2026-06-15) — pending regulated solicitor sign-off

This letter cites the following authority, which the AI has checked against current GOV.UK / legislation.gov.uk:

  • Section 203(3) Employment Rights Act 1996 (independent legal advice requirement): confirmed currently in force. A settlement agreement ("compromise agreement") is only valid if the employee has received independent legal advice from a qualified adviser. Correctly stated as a mandatory condition.
  • Sections 401–403 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) — £30,000 tax-free termination payment threshold: confirmed currently in force. The £30,000 tax-free threshold for ex-gratia termination payments (not contractual notice, post-employment notice pay, or statutory redundancy pay above the £30k threshold) is correctly stated. Note: post-employment notice pay (PENP) is taxable regardless — reviewer should confirm this nuance is not obscured.
  • "Without prejudice" protection: the without-prejudice rule is a common-law evidential rule (confirmed in Rush & Tompkins Ltd v GLC [1989] AC 1280 and Unilever plc v Procter & Gamble [2000] 1 WLR 2436) that prevents without-prejudice settlement negotiations from being referred to in tribunal/court proceedings. "Subject to contract" prevents a binding contract arising from preliminary correspondence. Both labels are correctly used.
  • 10 calendar days — ACAS guidance on reasonable time to consider: confirmed as the ACAS recommended minimum in its settlement agreement guidance. This is not a statutory minimum but a best-practice recommendation.

Reviewer focus areas: (1) IMPORTANT — Confirm whether the post-employment notice pay (PENP) rules (in force since April 2018 under Finance (No.2) Act 2017) are adequately flagged. PENP is fully taxable and is calculated on a formula basis; this significantly affects the tax-free element. The letter's reference to sections 401-403 ITEPA 2003 should note this limitation. (2) Confirm that the £30,000 threshold has not been altered by any Finance Act since 2017. (3) Confirm whether the Employment Rights Bill 2025-2026 makes any changes to the settlement agreement regime. (4) Verify the current "without prejudice save as to costs" distinction if costs arguments become relevant.

This AI cross-check is an aid only; final sign-off requires a regulated solicitor.

Your details

E.g. "an agreed factual reference and verbal positive reference for two years."

E.g. waiver of restrictive covenants, contribution to legal fees, equipment retention.

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Disclaimer

This information is for general guidance only and does not constitute legal advice. You should seek qualified legal help if your situation requires it.