Tax on a redundancy payment in a settlement agreement works in the following way: Basic Principle: Up to £30,000 is tax-free: Your employer can pay you up to £30,000 as a tax-free redundancy payment. This covers statutory redundancy pay and any additional redundancy pay you may receive under your employment contract or a settlement agreement. What is taxed: Exceeding £30,000: Any amount of redundancy pay that goes over £30,000 is taxable as income. This will be subject to income tax at your usual rate. Other payments: If the settlement agreement includes payments that are not directly for redundancy (e.g., payment in lieu of notice, compensation for unfair dismissal, or other contractual entitlements), these are generally taxable unless they meet specific exemption criteria. However, some of these payments might also fall under the £30,000 tax-free allowance if they are genuinely part of your redundancy package. How it's taxed: PAYE (Pay As You Earn): Your employer will usually deduct tax and National Insurance contributions from any taxable portion of your redundancy payment through the PAYE system. They will report this to HMRC. P45: You will receive a P45 from your employer, detailing the payments made and the tax deducted. Important Considerations: Settlement Agreement: A settlement agreement is a legally binding contract where you agree to give up your right to make certain claims against your employer in return for a compensation payment. It's crucial to have a solicitor review a settlement agreement before signing. Legal Advice: It is highly recommended to seek independent legal advice from a solicitor experienced in employment law before signing a settlement agreement. They can advise you on: The terms of the agreement. Whether the redundancy payment is fair. How the tax implications will affect your overall settlement. Whether there are any elements of the payment that can be structured to minimise tax. Payment in Lieu of Notice (PILON): If your settlement agreement includes a payment in lieu of notice, this is generally taxable. However, if you receive *no* notice and PILON is paid, it can sometimes be considered part of the tax-free £30,000 allowance if it's treated as a redundancy payment. A solicitor can clarify this for you. Compensatory vs. Contractual Elements: The tax treatment can sometimes depend on whether a payment is considered "compensatory" (e.g., for unfair dismissal) or "contractual" (e.g., ordinary pay). In summary: Your employer can give you up to £30,000 tax-free as part of your redundancy package. Any amount above this, or other payments within the settlement agreement (unless specifically exempt), will be subject to income tax. Always seek legal advice to understand the specific tax implications for your situation.

Tax on the transition payment in your settlement agreement

You receive a transition payment via a settlement agreement (VSO) — and it then turns out that the Dutch Tax Authority (Belastingdienst) claims a significant portion. How that works exactly, what rate you can expect, and what you may be able to do to reduce the tax burden, you can read here. For your own situation it is always advisable to seek legal and tax advice.

The transition payment is always a gross amount

Whether you leave employment via UWV, the subdistrict court, or via a VSO: the payment stated in the agreement is always gross. Your employer is required to withhold wage tax before the amount appears in your account. What you ultimately receive net depends on your total annual income in the year of payment.

The Dutch Tax Authority (Belastingdienst) regards the transition payment as income from previous employment. This means that the amount is added to your regular annual income and taxed under the progressive income tax system. The higher your combined income, the heavier the rate.

Which tax rate applies in 2026

The transition payment falls under the so-called green table for special remuneration. This table does not include the employment tax credit (arbeidskorting), which means the effective rate is often higher than you would expect based on your normal salary.

For employees below the state pension age (AOW), the following percentages apply in 2026 (depending on the combined income including the payment):

• Up to approximately € 29,737: approximately 35.75% wage tax
• Between approximately € 29,737 and € 78,427: approximately 37.56% (when the wage tax credit offset percentage is applied, this can rise to approximately 43.96%)
• Above approximately € 78,427: 49.50%

Because your employer does not always know your total annual income precisely, they often withhold tax at the higher rate to avoid a subsequent assessment. When you file your income tax return, it will then be determined whether you have overpaid — and are therefore due a refund — or whether you owe an additional amount.

The settlement agreement and the level of the payment

In a standard dismissal procedure via the UWV or the subdistrict court, a statutory maximum of € 102,000 gross applies in 2026 (or one gross annual salary if that is higher). With a settlement agreement that maximum does not apply: you may agree a higher payment with your employer. In practice, the statutory transition payment serves as the starting point for negotiation, but there is often scope for more — particularly if you have a good understanding of your position.

One important point to bear in mind: because the payment is made in a single lump sum, your income for that year may temporarily fall into a higher tax bracket. This is a direct consequence of progressive taxation and is something to take into account when negotiating the level of the payment.

Options for reducing the tax burden

There are a number of legally recognised ways to limit or reduce the tax on your transition payment. These are not loopholes, but genuine fiscal instruments. Do seek personal advice on these, as the available options depend heavily on your individual circumstances.

• Use for training or outplacement: If your employer pays the costs of a training course or outplacement programme directly to the training provider or agency — that is, before the payment is made to you — you pay no tax on that portion. If you receive the money yourself first and then pay for the course, the amount is subject to tax. This must be properly recorded, ideally in the settlement agreement itself.
• Payment into an annuity: If you have a pension shortfall, you may invest (part of) the net payment into an annuity insurance policy or banking annuity. Within your annual allowance, that contribution is deductible in box 1, thereby reducing your taxable income. At the same time, you build up pension capital that falls outside box 3. Please consult a financial adviser regarding this.
• Payment spread across two calendar years: If the payment of the compensation is spread over two years, the progressive tax disadvantage can be limited. This must be explicitly recorded in the settlement agreement.
• Check the withholding after the fact: Has your employer withheld too much wage tax? If so, you can reclaim the excess amount when filing your income tax return. Always check this.
• Letten op toeslagen: The transition payment counts as income for benefits such as the healthcare allowance (zorgtoeslag) and housing benefit (huurtoeslag). A high payment can result in your entitlement to these benefits being (partially) lost in the year of payment.

The averaging scheme has been abolished

Up to and including the 2024 tax year, the averaging scheme (middelingsregeling) existed: a scheme that allowed you to spread the tax burden over three years in the event of strongly fluctuating income. Since 1 January 2025, this scheme has been definitively abolished. For a transition payment paid out in 2025 or later, averaging is therefore no longer an option. This makes it all the more important to think carefully in advance about the tax consequences and any alternatives.

Why Employment Lawyer Eindhoven

Signing a settlement agreement without knowing exactly what net amount you will be left with? That is a missed opportunity. At Arbeidsjurist Eindhoven, we help you not only with reviewing and negotiating your settlement agreement, but also with identifying the points of attention surrounding the payment — so that you can sign with confidence. We work for people in Eindhoven and the wider Brabant region. Contact us without obligation for an initial consultation.

Frequently asked questions

Do I pay tax on the transition payment in my settlement agreement?

Yes. The Dutch Tax Authority (Belastingdienst) regards the transition payment as income from previous employment. Your employer withholds wage tax before paying out the amount. The exact rate depends on your total annual income including the payment. When you file your income tax return, it is then determined whether you have paid too much or too little tax.

Can I benefit from my transition payment free of tax?

Yes, in part. If your employer pays the costs of training or an outplacement programme directly to the provider — that is, before the payment is made to you — that portion is exempt from tax. If you receive the money yourself first and only pay for the training afterwards, the amount is subject to tax. This must be arranged in advance, preferably in the settlement agreement itself.

Is there a maximum for the transition payment in a settlement agreement?

In a formal dismissal procedure via UWV or the subdistrict court, a statutory maximum of €102,000 gross applies in 2026 (or one gross annual salary if that is higher). In a settlement agreement, this maximum does not apply — meaning you can agree on a higher payment. This makes negotiating particularly worthwhile.

Can I use the transition payment to pay less tax by means of an annuity (lijfrente)?

This is possible, provided you have a pension shortfall (annual margin/jaarruimte). Within that margin, you may deduct a contribution to an annuity insurance policy or banking annuity in box 1, thereby reducing your taxable income. The accumulated capital also falls outside the deemed return tax (vermogensrendementsheffing) in box 3. This is a tax decision that depends on your personal circumstances; always seek advice from a financial adviser on this matter.

Is the averaging scheme still an option for saving tax on my transition payment?

No. The averaging scheme, which allowed you to spread tax on fluctuating income over three years, was definitively abolished on 1 January 2025. For transition payments paid out from 2025 onwards, this option is no longer available.

We are happy to think along with you. For advice tailored to your situation, we would be glad to talk. No rights can be derived from the content of this page and it may contain inaccuracies.