Should an employer pay the legal costs for an employee’s advice on a Settlement Agreement?

September 19th 2023

There is no legal requirement that an employer should pay for an employee’s legal advice on a Settlement Agreement. However, it is usual for them to do so as it is necessary for the employee to receive independent legal advice on the terms and effect of the Settlement Agreement for this to be valid.

Most contributions are around £500 plus VAT but the contribution tends to be higher where senior executives are involved or if there is a requirement to have a two-stage settlement. This is where there is a requirement for a letter or second Agreement to be signed on or shortly after the termination date as there is a material gap between signing the original Settlement Agreement and the termination date.

Are the Legal Fees exempt from tax?

There may be tax exemptions for legal costs if certain conditions are satisfied. The exemption only applies to legal costs incurred exclusively in connection with the termination of the employee’s employment and the settlement agreement provides for the payment to be made by the employer directly to the employee’s lawyer.    The definition of “legal costs” means fees payable for the service and disbursement of a lawyer and “lawyer” is also defined by the legislation so should be checked. 

For tax advice we would recommend seeking specialist advice from an accountant or other tax specialist.  

The contents of this article is a general guide only at the date of publication.  It is not comprehensive, and it does not constitute legal advice.  Specific legal advice should be sought in relation to the particular facts of a given situation.