Unfair Dismissal: The End of the Compensation Cap

One of the most significant employment law changes on the horizon has received surprisingly little attention outside the legal profession: the removal of the statutory cap on compensation for ordinary unfair dismissal.

For decades, employers assessing the risk of an unfair dismissal claim have had a relatively predictable upper limit in mind. While tribunals could award compensation for loss of earnings and benefits, the compensatory award was capped at the lower of one year’s gross pay or the statutory maximum (currently £123,543). From 1 January 2027, that cap is due to disappear.

What is changing?

The Employment Rights Act 2025 removes both elements of the current compensatory award cap. As a result, compensation for ordinary unfair dismissal will no longer be subject to any statutory maximum. At the same time, the qualifying period for bringing an unfair dismissal claim will reduce from two years’ service to six months.

The practical consequence is a significant increase in potential exposure for employers, particularly where senior, specialist or long-serving employees experience extended periods of unemployment following dismissal.

Why does it matter?

Under the current regime, many unfair dismissal claims are effectively constrained by the statutory cap. Even where an employee’s actual financial losses exceed the cap, employers can often assess their worst-case exposure with a reasonable degree of certainty. 

From January 2027, tribunals will instead focus on the employee’s actual losses, applying the usual principles of causation, mitigation and future loss. This means claims may include not only salary, but potentially lost pension contributions, benefits, bonuses and other contractual remuneration where recoverable under established unfair dismissal principles.

Take the example of an employee earning £65,000 per year in a specialist role. Under the current regime, compensation would generally be capped at approximately one year’s pay. Once the cap is removed, the tribunal’s focus becomes how long it is likely to take that individual to secure comparable employment and what losses they will incur in the meantime. Depending on the facts, the potential value of claims could increase substantially. Of course, tribunals will continue to scrutinise evidence regarding mitigation, future employment prospects and the likelihood that employment would have continued in any event.

A shift in litigation and settlement strategy

The removal of the cap is likely to be particularly significant for higher-paid employees. Historically, ordinary unfair dismissal claims have often been of limited commercial value for senior executives because the statutory cap significantly reduced potential recoveries. Employers frequently viewed the cap as an important reference point when assessing settlement values and litigation risk.

Once the cap is removed, the value of unfair dismissal claims may start to resemble other uncapped employment claims, such as discrimination and whistleblowing claims, particularly where the claimant experiences lengthy ongoing loss. As a result, employers may find that settlement negotiations become more complex and potentially more expensive.

What should employers be doing now?

Although the reforms do not take effect until January 2027, employers should start reviewing dismissal processes well in advance. The financial consequences of procedural mistakes are likely to increase significantly once compensation is no longer capped.

In practical terms, employers should focus on:

• • ensuring managers are trained on fair dismissal procedures; 
  • reviewing disciplinary, capability and redundancy processes;
  • documenting decision-making carefully;
  • considering legal advice at an earlier stage in higher-risk dismissals; and
  • reassessing litigation and settlement strategies in light of potentially increased exposure.

Key takeaway

The removal of the unfair dismissal compensation cap marks a fundamental change to the risk profile of dismissals. Combined with the reduction of the qualifying period from two years to six months, employers will face a larger pool of potential claimants and significantly greater financial exposure in successful claims. Employers who have historically relied on the statutory cap as a ceiling on risk may need to rethink that approach as 2027 approaches.

Are you wondering how your business can prepare? Get in touch with the Employment team at Glaisyers to discuss your options.