Employment Rights Act 2025 – removal of the compensatory cap for ordinary unfair dismissal claims

Tyler Ross, Solicitor

In November, the Government announced it no longer plans on introducing day one protection from unfair dismissal and that it has instead agreed to reduce the qualifying period from two years to six months. In the same announcement, the Government confirmed a significant change to compensation for unfair dismissal claims: the statutory cap will be removed entirely.

Currently, compensation for unfair dismissal is capped at 52 weeks’ gross pay or £118,223, whichever is lower. Under the proposed reforms, awards for loss of earnings would be uncapped, bringing unfair dismissal compensation in line with whistleblowing and discrimination claims.

What does this mean for employers?

1. The most significant impact for employers would be increased financial exposure. In practical terms, getting a dismissal wrong could become considerably more expensive.
2. The change would also likely affect claims brought by senior or highly paid employees. At present, employers have a degree of certainty about their potential liability when dismissing employees earning above the cap. Removing the cap could expose employers to awards reflecting an employee’s full remuneration package, including bonuses, commission, long-term incentive plans and share-based awards.
3. Uncapped compensation is also likely to influence settlement discussions. Without a definite ceiling, employees’ settlement expectations may increase, and employers will no longer be able to rely on the cap as a clear upper limit in negotiations.
4. On the other hand, the removal of the cap may have a positive impact on the profile of tribunal claims. Claimants may be less inclined to pursue more complex whistleblowing, and/or discrimination claims solely to avoid the unfair dismissal compensation cap. If so, this could reduce the number of complex claims being brought and help avoid the additional cost, time and evidential burdens they often bring.
5. The Government has promised to publish an impact assessment on the removal of the compensatory cap, but it is not clear that there will be any further consultation on this measure before its introduction.

What happens next?

The Employment Rights Act 2025 received royal assent on 18 December 2025.

The Government has yet to announce the date on which the removal of the cap will take effect, however, it seems most likely that it will coincide with the introduction of the new qualifying period from 1 January 2027.

Employers should start preparing now to ensure they are ready to comply with the incoming law and to minimise their financial exposure associated with an Employment Tribunal process. Probation management will be the focus for many businesses from as early as 1 July 2026.

If you require support in preparing for these changes, please contact the Kuits Employment team at [email protected] or 0161 832 3434.