A settlement agreement is a contract that ends your employment on agreed terms. In return for a payment, you give up the right to bring claims against your employer. The law protects you by making the agreement binding only after you have taken independent advice from a qualified adviser, such as a solicitor.

The money and the tax

Start with the payment. Check how much you will receive, when it will be paid and how it divides between contractual sums and compensation. Notice pay, holiday pay and any bonus you have earned are taxed as earnings. A compensation payment for loss of employment can be paid free of income tax up to £30,000, with tax due on the balance. Pay in lieu of notice is taxed as earnings, so check how the agreement describes each sum.

Ask whether the payment depends on anything, such as returning company property or a signature by a set date. Make sure the agreement says what happens to your pension contributions, share options and any company car or phone.

The claims you give up

The agreement will list the claims you are waiving, in a long schedule. Read it with your solicitor, who must sign a certificate confirming the advice, named in the agreement with their insurance. A waiver can cover claims you know about, but it cannot take away your accrued pension rights, and it should not cover personal injury you are not yet aware of. Raise any claim you think you have before you sign, because afterwards it is gone.

Look at the warranties you are asked to give. Many employers ask you to confirm that you have not found a new job or committed a breach of contract. If either statement is untrue, say so, because a false warranty can let the employer recover the payment.

References, confidentiality and fees

Agree the wording of your reference as part of the deal and attach it to the agreement. Agree an announcement to colleagues and clients too, so the story of your departure is one you can live with.

Most agreements include confidentiality clauses and limits on what you say about the employer. Those clauses cannot stop you reporting wrongdoing to a regulator or making a protected disclosure, and a sound agreement says so in plain terms.

Most employers contribute to your legal fees, since the agreement is not valid without your solicitor's advice. The agreement sets out the contribution, and the employer pays it to your solicitor. Ask for a fixed fee before the review starts, and allow two working days for a first reading.

This briefing is general information, not legal advice.