UK Cuts Unfair Dismissal Wait to 6 Months, Scraps £123,543 Compensation Cap
Updated
Updated · Edinburgh Chamber of Commerce · Jun 2
UK Cuts Unfair Dismissal Wait to 6 Months, Scraps £123,543 Compensation Cap
3 articles · Updated · Edinburgh Chamber of Commerce · Jun 2
From 1 January 2027, the Employment Rights Act 2025 will let employees bring ordinary unfair dismissal claims after six months’ service instead of two years, while removing the current £123,543 cap on compensatory awards.
The shift follows Labour’s retreat from a planned day-one right after opposition from the House of Lords and businesses, settling on a six-month threshold as a compromise.
Uncapped awards will still be limited by employees’ duty to mitigate losses and by tribunal reductions such as Polkey deductions, but they could now cover full lost earnings, bonuses, LTIPs and pension contributions.
High earners and senior executives are expected to gain most because few current cases hit the cap—the average award is about £13,700 and the median £6,747—yet employers also face more nuisance claims and tougher settlement talks.
With no transition period, employees hired before July 2026 will gain protection on 1 January 2027, pushing employers to tighten probation, notice, performance management and insurance planning.
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Major UK Employment Law Changes Coming January 2027: Uncapped Compensation, Shorter Qualifying Periods, and New Risks
Overview
The Employment Rights Act 2025 marks a major overhaul of UK employment law, with key changes taking effect from January 2027. The government has clarified these reforms, especially around unfair dismissal, by publishing new guidance. The Act reduces the qualifying period for unfair dismissal protection, extending rights to more workers and introducing uncapped compensation in certain cases. These changes reshape the landscape for both employers and employees, making it crucial for businesses to update their policies and processes. The reforms aim to create fairer workplaces and require employers to be more proactive in managing employment relationships.