The unfair dismissal cap is going in January 2027. Is there a “people panic” on?

The FT recently reported (26 June) that finance and tech employers are “rushing to fire underperforming executives” and toughening up probation processes ahead of January 2027, when the cap on unfair dismissal compensation is abolished. The FT said that it had been told by several lawyers that clients were clearing out “deadwood in senior leadership” and that employers should brace for “substantially larger awards” and a tribunal system that will be pushed further into crisis.

What is actually changing and how will this affect your business?

Since the unfair dismissal compensation cap was introduced in 1971, compensatory awards have been subject to a statutory cap, currently, the lower of a year’s pay or roughly £123k. From 1 January 2027, that cap will disappear.

But “in theory” is doing a lot of work in the coverage so far, and it’s worth stress-testing the story before treating it as something that could impact a large proportion of the UK workforce.

Let’s start with scale.

As the FT reports, 840k people earned more than the £123,543 compensation limit in 2025-26. This sounds like an alarming figure when set against the 34.4 million people who are in employment in UK (ONS, Feb-Apr 2026), approximately 2.5% of the workforce.

However, the FT’s example describes what some analysts are seeing in the financial and tech sectors, so this is not an economy-wide reckoning, more a snapshot of those sector’s concerns. It’s also not what we are seeing on the ground here at LLC; so far, we haven’t had clients request advice on direct action against executives, though clients definitely do want to understand the changes and the implications.

What’s important is to consider how unfair dismissal compensation works and what are the range of implications of the removal of the cap.

A UK employment tribunal awards compensation for financial loss – broadly speaking – based on actual loss to the individual, and this usually means future loss of earnings. With the cap removed on this loss of salary, high earners, who were typically not attracted by unfair dismissal claims, may now see it as worth their while pursuing their employer for compensation.

But note that individuals are expected to mitigate that loss by actively looking for another job. Though it is not yet clear how tribunals will assess the new uncapped compensation, if they follow the existing rules, mitigation will still be an important part of the equation. So, an employer will still be able to “cap” awards by demonstrating that the individual should have got another job within 6 or 9 months, thus losses will be capped at 6 or 9 months’ pay.

It’s possible, however, that there will be larger awards where claimants manage to successfully persuade a Tribunal that the market is really difficult and it will take at least 2 years to find another job. The cap is no longer there to prevent those sorts of losses. There may even be a few cases where claimants establish that they can never work again due to stress or a breakdown or similar. In which case, a simple unfair dismissal case has suddenly become very expensive.

There’s also a case for the opposite conclusion to the one being drawn. Part of the reason discrimination and whistleblowing claims have increased is that they’re the only route to compensation beyond the unfair dismissal compensation cap. Claimant lawyers have used discrimination and whistleblowing allegations as a means of strengthening their client’s case to help get round the cap. The Government hopes that by removing the cap the incentive to do that will weaken. So could the cap, in fact, result in fewer inflated claims and actually free up the Tribunal system?

The Labour Government has introduced a range of challenges in a new Employment Rights Act 2025 – the removal of the cap is just one of many. Indeed, the amount of service required for bringing a claim will drop from two years’ service to six months. This is a very significant change to the rules which we’ll come on to discuss in future posts.  

Our advice is don’t “people panic” but do be prepared and start to consider how the legislation might impact your business.