UK confirms unfair dismissal compensation cap will be lifted without further consultation

The government confirmed that it would be removing the current cap on unfair dismissal awards as part of the changes being brought in by the 2025 Employment Rights Act.

It has also confirmed that the minimum service requirement for unfair dismissal will be lowered from two years to six months, as part of a tranche of changes coming into force on 1 January 2027.

• Read more: How the Employment Rights Act will affect you

Anne Sammon, an employment law expert with Pinsent Masons, said confirmation of the removal of the compensation cap would give employers a greater degree of certainty for planning how to handle potential awards. But she also warned: "Employers will need to think holistically about their remuneration structures and the consequences of these for unfair dismissal awards, and advice may be needed for mitigation strategies”.

“In terms of wider strategies, these might include making enhanced redundancy payments - or other payments that are dependent on redundancy status - contingent on the employee entering into a settlement agreement to avoid employees being able to receive such an enhanced payment and still bring an unfair dismissal claim."   

Under the change, the existing cap on compensatory awards for unfair dismissal – which currently stands at the lower of either £118,223- or 52 weeks’ gross pay – will be removed entirely.

The government confirmed in an update (2-page PDF) that it would not be carrying out further public consultation on the changes to unfair dismissal, having previously said there would be an impact assessment before the new regulations are enacted.

“These measures are the conclusion of a series of constructive, government-convened conversations between trade unions and business representatives, and follow rigorous parliamentary debate,” it said.

Removing the cap had been one of the issues that had slowed the ERA’s progress into law, after the House of Lords originally pushed back on the proposal.

The lowering of the minimum service period had been a sticking point in the Act’s progress through Westminster last year, with the government being forced to drop its initial plans for day one protection from unfair dismissal.