The Unfair Dismissal Compensation Cap Is Being Removed: A Complete Guide

The single biggest change to UK employment compensation in decades is coming: from 1 January 2027, the statutory cap on unfair dismissal compensation is abolished. This guide explains what the cap is, what replaces it, how compensation is actually calculated, and what it means in practice for anyone facing dismissal or holding a settlement offer.

What the cap is today

Unfair dismissal compensation has two parts:

• The basic award — calculated like statutory redundancy pay, from age, length of service and weekly pay. This part is unchanged.
• The compensatory award — your actual financial loss. This is the part that is capped.

The compensatory award cap is currently £118,223, or 52 weeks' gross pay, whichever is lower, rising to £123,543 from April 2026. Both limits — the cash figure and the 52-week alternative — disappear from January 2027 under the Employment Rights Act 2025.

For context, the median compensatory award was £6,746 in 2023/24 across 646 reported cases. The cap has never affected the typical claim. It has only ever bitten on high earners and long losses.

What "uncapped" does and does not mean

Uncapped does not mean unlimited. It means the tribunal is no longer prevented from awarding your full loss. Everything else still applies:

• Compensation must reflect actual financial loss — lost earnings, pension, benefits, and the period until you realistically find comparable work.
• You must mitigate your loss by looking for work. Failure to do so reduces the award.
• Contributory conduct reduces the award where your own behaviour contributed to the dismissal.
• Polkey reductions apply where a fair process would probably have led to dismissal anyway.
• Awards for injury to feelings still only arise in discrimination claims, not plain unfair dismissal.

So the change is narrow but powerful: for anyone whose genuine loss exceeds the old ceiling, the ceiling is gone.

Who this actually changes things for

• High earners. On £150,000+, 52 weeks' pay and the cash cap both bit. Now the number is whatever the loss is.
• People with bonus and share awards. Deferred bonus and unvested equity are part of the loss. Under the cap, they were often academic.
• People with long recovery periods. Specialist roles, regulated roles, or industries with few comparable jobs produce long loss periods that the cap previously truncated.
• People with a strong claim and a weak offer. The realistic alternative to signing just got more valuable.

If you are on median pay and expect to find similar work within a few months, the cap was never your constraint and this change will not transform your case.

Why this makes settlement agreements more important, not less

A tribunal claim is slow, public and uncertain. A settlement agreement is fast, private and certain. What changes in 2027 is the price of certainty for the employer: the risk they are buying out is no longer capped, so a well-evidenced claim is worth more at the negotiating table.

Practical consequences:

1. Offers should be benchmarked against uncapped exposure, not last year's ceiling.
2. Evidence matters earlier. The value of your claim is now driven by how well you can document loss — payslips, bonus history, share schemes, job-search records.
3. Timing shifts. Employers are more likely to open settlement conversations before a dismissal, not after.

Read our related guides on how much you should get in a settlement agreement and settlement agreement tax, or use the settlement agreement calculator for a quick estimate.

How your compensation is worked out

1. Immediate loss — earnings from dismissal to the hearing date.
2. Future loss — earnings from the hearing until you realistically reach equivalent pay.
3. Pension loss — often the most under-claimed element.
4. Benefits — car, medical cover, bonus, share awards.
5. Loss of statutory rights — a nominal sum.
6. Adjustments — ACAS Code uplift of up to 25%, Polkey and contributory reductions.

The single biggest lever, once the cap is gone, is the length of the future-loss period. That is an evidential question, not a legal one — which is why documentation wins cases.

What to do now

• If you are in a process: keep a written record of every meeting and every job application.
• If you have an offer: do not accept a pre-2027 valuation of a post-2027 risk. Get it reviewed.
• If you are already in a claim: check whether your schedule of loss was drafted against the cap.
• If you are unsure: the advice is free, and in almost every case your employer pays for it.

Frequently asked questions

Does the cap removal apply to dismissals before January 2027?

The intention is that it applies to dismissals on or after commencement. Timing of your dismissal therefore matters — take advice on which regime applies to you.

Is the January 2027 date confirmed?

It is the government's stated intention under the Employment Rights Act 2025 rather than a formally commenced date. Plan for it; do not bank on the exact day.

Does this change the two-year qualifying period?

Separately, the Act moves unfair dismissal towards a day-one right. That change and the cap removal together widen both who can claim and what a claim is worth.

Does the basic award change?

No. Only the compensatory award is uncapped.

Get advice

Deen & Co Solicitors provides free, same-day settlement agreement advice to employees across England and Wales, with fees paid by the employer in almost every case. Employers should read our companion guide, preparing your business for uncapped unfair dismissal awards.

Call 0208 551 0476 or request a callback.