In the UK, “severance package” is commonly used to describe the financial and contractual terms offered when employment ends, often through a settlement agreement. A severance package is often offered by an employer to incentivise an employee to accept a settlement agreement (formally known as a compromise agreement). The employer will offer financial compensation as part of the severance package to induce the employee to waive their employment rights and agree not to pursue any future legal claims. One of our Employment Solicitors, Laura Colebrook, explains about severance pay and the associated package that can be negotiated.
Quick answer: What is a severance package?
A severance package is the financial and contractual offer an employer may make when ending your employment. In the UK, it is often provided as part of a settlement agreement.
It can include:
- a financial payment (sometimes called compensation or an ex gratia payment)
- notice pay and any outstanding salary or holiday pay
- terms about confidentiality and references
Severance packages are not automatic and can often be negotiated. You will usually need independent legal advice before agreeing to a settlement.
Can an employee negotiate a better severance package?
Yes, many employers actually expect negotiation, especially during protected conversations. You may be able to increase the financial offer or improve other terms.
When deciding whether to accept a severance package, an employee should weigh up:
- the strength of any potential legal claims they may have against their employer
- the financial value of the offer
- additional benefits, such as references or extended notice periods.
What should be included in a severance package?
A severance package typically includes:
- a compensation payment
- notice pay
- any accrued holiday pay
- a contribution towards the employee’s legal fees so they may get professional advice
Some packages may also include bonuses, benefits, or enhanced redundancy payments.
What are the tax and confidentiality considerations of severance packages?
Severance package payments are subject to tax rules, although generally, termination payments up to £30,000 are tax-free. An employment solicitor will be able to explain how these payments are typically handled by the tax man, and they can also review how the settlement agreement affects:
- company property
- shares or options
- company benefits (e.g., medical insurance or car schemes)
- bonus payments
Confidentiality clauses are also standard in settlement agreements. These clauses prevent employees from disclosing details of the agreement, although exceptions typically allow disclosures to close family, legal advisers, or regulators.
Do I need a solicitor if I’m offered a severance package?
If you are offered a severance package as part of a settlement agreement, you are legally required to obtain legal advice before signing. Your legal adviser works for you, not your employer, and their job is to make sure the terms you are agreeing to are fair before you sign. An employment solicitor will explain what rights you are giving up, assess whether the terms of the agreement are lawful, and help you understand whether the agreement is reasonable in light of your circumstances.
In most cases, your employer will offer to pay a fixed contribution toward your legal fees, typically ranging from £500 to £750 + VAT.
Your solicitor will also be experienced in negotiating severance packages and will have a good idea at the outset whether they think an offer can be improved. A solicitor can make representations on your behalf and will often cover negotiation points such as:
- a higher settlement sum
- a more favourable job reference
- the removal or softening of restrictive covenants, such as working for competitors
- a mutual confidentiality or non-disparagement clause (prevents either party from making negative, derogatory, or harmful statements about the other)
- full financial coverage from the employer for the employees’ legal advice, so they do not need to contribute any money personally
If anything is unclear or missing, an employment solicitor will also raise the appropriate queries with the employer and ensure they are rectified before the settlement agreement is finalised.
How we can help you negotiate a severance package
Legal advice is essential if you are offered a severance package, so you can ensure any agreement offered is fair and try to improve the offer or secure better post-employment protections.
If you would like help negotiating a severance package and/or settlement agreement, or any other employment law issue, please contact: