No Cap, No Limit: What the Removal of the Unfair Dismissal Compensation Cap Means for UK Employers

From January 1, 2027, there will be no upper limit on what an employment tribunal can award an employee for unfair dismissal. Section 124 of the Employment Rights Act 1996 — the clause that has capped unfair dismissal compensation at £118,233 (or 52 weeks' gross pay, whichever is lower) for decades — is being repealed. That cap disappears entirely. Awards will be calculated the same way as discrimination claims: uncapped, based on actual losses, with no ceiling. For UK employers, particularly those with higher-earning staff, this is the single most significant change to employment law risk in a generation.

And it is six months away. The clock is already running.

What the Law Says Now — and What Changes When

Under existing law, if an employment tribunal finds that an employer unfairly dismissed a worker, the compensatory award is capped at the lower of:

• £118,233 (the statutory cap, uprated annually)
• 52 weeks' gross pay

For most employees, this means the realistic ceiling on a successful unfair dismissal claim is somewhere between £20,000 and £50,000, depending on salary and losses. A high-earning manager on £60,000 might be awarded up to £60,000 in a worst case. Significant — but bounded.

Two things change in the next six months, and they compound each other.

Change 1: Qualifying Period Drops to Six Months — July 1, 2026

Under the Employment Rights Act 2025, the qualifying period for unfair dismissal rights falls from two years to six months, effective for all new hires on or after 1 July 2026 — six days from today.

That means every person you hire from next Tuesday onwards will have full unfair dismissal rights by January 1, 2027. Previously, you had a 24-month buffer. You now have six months.

Change 2: Compensation Cap Removed — January 1, 2027

Section 124 of the Employment Rights Act 1996 is repealed on 1 January 2027. From that date, unfair dismissal compensation is uncapped — calculated on actual loss, future loss, and injury to feelings, exactly as discrimination awards are today. A tribunal can order an employer to pay multiple years of the employee's salary if the circumstances warrant it. There is no ceiling.

The Cascade — Why the Timing Matters

These two changes do not just run in parallel — they create a compounding exposure for employers who hire between now and the end of the year.

Consider this scenario:

1. You hire a marketing manager on July 1, 2026, on a salary of £65,000.
2. By January 1, 2027, she has six months' continuous service — and full unfair dismissal rights.
3. On January 1, 2027, the compensation cap is also repealed.
4. If you dismiss her unfairly in February 2027, the tribunal can award her actual losses: salary while she searches for work, future earnings differential, plus interest.
5. That award has no upper limit. If she cannot find comparable work for two years, you could face a £130,000+ award — with no cap to protect you.

This is not a hypothetical. It is the direct statutory consequence of hiring anyone after 1 July 2026 and dismissing them without a fair process after January 2027.

Who Is Most Exposed?

Every UK employer is affected, but the risk is sharpest for businesses with:

Higher-Earning Employees

Under the existing cap, dismissing a £120,000-a-year executive unfairly has a ceiling of £118,233 — damaging, but bounded. After January 2027, there is no ceiling. A senior manager who cannot find equivalent work for 18 months could generate a £180,000+ award with no limit.

Healthcare and Professional Services

GP practices dismissing salaried GPs, law firms parting ways with associates, accountancy firms letting go of qualified staff — these sectors routinely handle dismissals of employees on £60,000–£120,000+ salaries. Many of these employers have historically relied on the statutory cap as a backstop. That backstop is gone in six months.

Businesses That Hire Frequently

Hospitality operators, construction firms, and retailers who take on new staff regularly are accruing unfair dismissal risk across every hire they make from July 1 onwards. The more you hire between July and December 2026, the larger your pool of employees who will have full UD rights — with uncapped remedies — from January 2027.

Businesses Without Documented Processes

An employment tribunal's primary question is not whether the dismissal was commercially justified. It is whether the employer followed a fair procedure: did the employee know what was expected? Were concerns communicated in writing? Was there a fair investigation? Was the employee given a chance to respond? Businesses that cannot produce written evidence of these steps — a probation review record, a performance conversation log, a written warning — are at very high risk of an adverse finding.

Without the cap, an adverse finding after January 2027 carries no upper limit.

What You Must Do Before January 2027

The good news is that the defence against uncapped unfair dismissal risk is well-established. It is not about hiring fewer people. It is about documenting the people you do hire — and the decisions you make about them.

1. Audit Your Probation Policy

If your business does not have a written probation policy, create one now. It should specify: the probation period length (typically three to six months), what is assessed during that period, how reviews are conducted, and what happens at the end. For hires after July 1, 2026, the probation period and the qualifying period for UD rights are converging — make sure your policy is calibrated for a six-month window, not the old two-year assumption.

2. Include a Probation Clause in Every New Contract

A contractual probation clause is not the same as a policy document. The clause in the employment contract makes probation a defined term of employment, not just an internal process. It gives you a clearer procedural framework for the first six months and, critically, it demonstrates to a tribunal that the employee was aware of the evaluation framework from day one.

3. Document Performance Concerns in Writing — From Day One

Do not wait for a formal disciplinary process to create a paper trail. When a new employee is underperforming, send a brief written note — an email is sufficient — setting out what is expected, what the concern is, and what improvement looks like. Keep a copy. This single habit is your most effective protection against an uncapped unfair dismissal claim.

4. Conduct Structured Probation Reviews

A probation review does not need to be a lengthy meeting. It needs to be documented. A one-page written record — covering what was discussed, what was observed, what the employee said — is evidence that you were managing performance fairly. Most unfair dismissal claims in the tribunal succeed not because the employer had no basis for dismissal, but because they cannot prove the employee knew there was a problem.

5. Get Employment Legal Advice Before You Dismiss

After January 2027, the stakes of an unfair dismissal finding are too high to manage without professional input on any dismissal that is not clear-cut gross misconduct. If you are considering dismissing a higher-earning employee or one who might dispute the reason for dismissal, take advice before you act — not after the claim has landed.

What Does "Uncapped" Actually Mean in Practice?

To understand the stakes, it helps to look at how discrimination awards — which have always been uncapped — are calculated. An employment tribunal considers:

• Immediate loss: salary and benefits lost from the dismissal date to the tribunal hearing
• Future loss: salary and benefits likely to be lost going forward, based on how long it will take to find equivalent work
• Injury to feelings: applicable in discrimination cases; after January 2027, may apply to certain UD claims where the dismissal had a discriminatory element
• Pension loss: actuarial calculation of lost pension contributions — often underestimated by employers
• Interest: accrues from the dismissal date to the award date

For a senior employee on £80,000 who cannot find comparable work for 18 months, the cumulative award — immediate loss, future loss, pension contribution shortfall, and interest — could easily exceed £150,000. There is no cap to contain it.

How ComplianceAlert Helps

ComplianceAlert's Action Centre includes pre-built templates for probation management and performance documentation — the exact evidence trail that protects employers in employment tribunal proceedings.

When you activate a probation or performance management template, you get a step-by-step checklist: contract clause review, written probation plan, structured review meetings, written concern records. Every action you complete is stored in your Evidence Vault, time-stamped and audit-ready. If a claim is ever filed, you have a complete documented record of the process you followed — not a folder of vague recollections.

Ask Alice — ComplianceAlert's AI compliance assistant — any question about your specific situation: "What documentation do I need before dismissing a probationary employee hired after July 1?" She checks your compliance status, your completed actions, and your evidence, and gives you a specific answer based on what you've actually done — not generic legal disclaimers.

From January 2027, your probation and dismissal process is no longer just HR best practice. It is your primary financial protection against unlimited tribunal awards.

Start free at compliancealert.co.uk — no card required →

Frequently Asked Questions

Does the cap removal apply to existing employees?

The January 2027 cap removal applies to all unfair dismissal claims from that date, regardless of when the employee was hired. However, the six-month qualifying period change only applies to employees hired on or after 1 July 2026 — employees hired before that date still need two years' service for full UD rights.

Can I dismiss an employee within the first six months without risk?

Yes — employees hired after 1 July 2026 do not have full unfair dismissal rights until they have six months' service. However, they retain rights from day one in respect of automatically unfair dismissal (whistleblowing, protected characteristics, asserting a statutory right) and wrongful dismissal. The six-month qualifying period is not a free dismissal window — it is a period with a lighter procedural burden, not no burden at all.

Does this affect the basic award?

The basic award — calculated on length of service, age, and weekly pay — remains unchanged and is subject to its own cap (currently £21,000 for one week's pay × years of service × age multiplier). The change from January 2027 applies to the compensatory award, which is where the real financial exposure sits.

Does this apply to all sectors?

Yes. The Employment Rights Act 2025 applies to all UK employers, all sectors, all employee types (full-time, part-time, zero-hours, fixed-term). The only exception is employees with fewer than six months' continuous service (for hires from 1 July 2026 onwards) and self-employed contractors — who are not employees and cannot bring unfair dismissal claims.

What should I do right now?

Three immediate actions: (1) review your probation policy and update it for a six-month qualifying period; (2) ensure every new hire from 1 July 2026 has a written probation clause in their contract; (3) start documenting any performance concerns for existing employees in writing today.

Key Dates — Your Timeline

TL;DR — The Key Takeaways

• From 1 July 2026 (six days away), new hires get unfair dismissal rights after six months, not two years
• From 1 January 2027, the compensation cap (£118,233) is repealed — awards become unlimited
• The two changes compound: every hire from July 1 is a potential uncapped UD claim from January 2027
• The defence is documentation: probation policy, written contracts, performance records, structured reviews
• This affects every UK employer — all sectors, all sizes
• Law firms and employment solicitors are writing about this. Zero SMB compliance tools are. Get ahead of it now.

Need a specialist to review your probation and dismissal procedures before July? Find a vetted employment solicitor at compliancemarket.co.uk/employment-lawyers.