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UK Employment Rights Act 2025 Lifts Cap on Unfair Dismissal Compensation Claims

By Justin T Tarka
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The UK government recently released guidance clarifying that from January 1, 2027, employment tribunals will no longer be subject to a statutory cap when reaching judgments on unfair dismissal compensation claims. The rationale behind the change is revealed in the government’s January 2026 “Factsheet: Unfair Dismissal,” which states that lifting the cap “will deter employers from treating the cost of dismissing employees unfairly as part of business as usual.”

Quick Hits

  • In January 2026, the UK government published guidance titled “Factsheet: Unfair Dismissal” to clarify provisions of the UK Employment Rights Act 2025.
  • The qualifying period for unfair dismissal claims will be reduced from two years to six months.
  • From January 2027, employees may find it easier to bring unfair dismissal claims, while employers could face higher costs in defending them.

The Employment Rights Act 2025 will introduce a substantial shift in unfair dismissals claims for employers. Currently, the compensatory award is set at £118,223 (or fifty-two weeks’ gross pay—whichever is lower) but from January 2027 both thresholds will be abolished, and tribunals will access compensation based solely on the employee’s actual financial loss. While the basic award will remain unchanged, compensation will become uncapped, bringing rewards in line with discrimination and whistleblowing claims.

For employers, this may mean that there is increased financial risk—particularly regarding highly paid employees or those in senior roles where dismissal leads to prolonged unemployment or loss of benefits.

Alongside the removal of the compensation cap, the qualifying period for unfair dismissal claims will be reduced from two year to six months, with both changes coming into force on January 1, 2027. It is thought that this reform seeks to replace the government’s original proposal to introduce unfair dismissal as a “day one” right, which was met with resistance during parliamentary review.

Under the new measures, employees will be eligible for unfair dismissal protection once they have completed six months of service.

Ogletree Deakins’ London office will continue to monitor developments and will post updates on the Cross-Border and United Kingdom blogs as additional information becomes available.

Justin T. Tarka is a partner in the London office of Ogletree Deakins.

Lorraine Matthews, a practice assistant in Ogletree Deakins’ London office, contributed to this article.

Ella Strickland, a marketing assistant in Ogletree Deakins’ London office, contributed to this article.

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Justin T Tarka
Partner, London

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