On 1 January 2027, a finance director earning £300,000 plus bonuses who gets dismissed without proper process won’t face the current £118,223 compensation ceiling. Neither will the tech executive on a £500,000 package. The cap vanishes entirely.
Employment tribunals will calculate full loss of earnings instead.
The government confirmed the change earlier this year as part of the Employment Rights Act 2025, publishing a factsheet that ruled out further consultation. For employers, particularly those managing senior executives or operating in high-earning sectors, the mathematics of dismissal just shifted dramatically. Exit negotiations will carry weight they’ve never had before, and probation periods—once administrative formalities—become make-or-break windows.
The current landscape offers employers a degree of financial predictability. Ordinary unfair dismissal claims cap out at £118,223, a figure that rises annually, or one year’s gross salary, whichever sits lower. That ceiling applies regardless of whether someone earns £50,000 or £5 million, provided no discrimination or whistleblowing elements complicate the picture.
For high earners, that’s meant limited upside in pursuing unfair dismissal claims. Many have instead framed exit disputes around discrimination or whistleblowing detriment—the only routes to uncapped compensation under current rules.
But 2027 changes the calculation entirely.
Tribunals will assess compensation based on actual loss of earnings, including bonuses and long-term incentives. A senior executive facing 18 months out of work while searching for a comparable role could be looking at awards stretching well into seven figures. The financial risk for employers removing someone on questionable grounds, or with minimal process, becomes substantially harder to quantify.
Certain elements remain unchanged. Contributory fault still applies—where an employee’s own conduct partially caused their dismissal, compensation reduces accordingly. Employees must still mitigate their losses by seeking alternative work. And Polkey deductions continue, allowing tribunals to reduce awards if they conclude the employee would have been dismissed anyway, even with fair process.
Yet those factors offer limited comfort when base calculations start from uncapped figures rather than a £118,223 ceiling.
The change arrives alongside another significant shift: employees gain unfair dismissal protection after six months of service, down from the current two-year threshold. That compression creates a narrow window—probation periods must now achieve what previously unfolded over 24 months.
For employment lawyers and HR departments, the calendar is already marked. January 2027 sits 13 months away at the time of the government’s confirmation, leaving organisations limited time to recalibrate processes that have operated under the capped regime for decades.
The immediate impact will concentrate in sectors employing substantial numbers of high earners: finance, technology, professional services, pharmaceuticals. A senior banker dismissed after seven months of employment, previously facing a capped claim, could pursue compensation reflecting their full package—base salary, bonus expectations, deferred compensation, benefits. The leverage in settlement negotiations shifts accordingly.
Employers might see one unexpected benefit. The proliferation of discrimination and whistleblowing claims—often pursued because they offered the only route to uncapped damages—may decline. Straightforward unfair dismissal claims become sufficiently valuable for high earners that adding complex, harder-to-prove elements carries less strategic necessity.
Still, the overarching message for employers is stark: prepare now, or face substantially elevated risk.
Probation periods demand immediate attention. With protection kicking in at six months rather than two years, the initial months of employment require careful management. That means objective-setting from day one, documented feedback, and prompt action when concerns emerge. Waiting until month five to address performance issues leaves minimal room for proper process.
Employment contracts need review. Payment in lieu of notice clauses—known as PILON clauses—provide flexibility in dismissals, allowing employers to end employment immediately while paying notice period salary. Without them, employers must work through notice periods that could inadvertently push employees past the six-month threshold.
The technicalities matter more than before. When calculating whether someone has accumulated sufficient service to bring an unfair dismissal claim, statutory notice rules add the minimum notice period where dismissal takes immediate effect. An employer paying in lieu of notice for someone at five months and three weeks might find that statutory notice pushes them over six months, granting protection that didn’t exist days earlier.
Don’t leave probation decisions until the final week before the six-month anniversary. The mathematics become unforgiving.
Capability, conduct, and redundancy procedures require scrutiny. Many organisations developed these processes when the compensation cap limited downside risk. Adherence to fair process becomes exponentially more important when potential awards stretch into seven figures. Training for managers who conduct these processes should follow—inconsistent application creates exposure.
Settlement strategies need recalibration. Ex gratia payments that previously seemed generous under the capped regime may no longer tempt departing employees to waive potential claims. A senior executive contemplating whether to accept £200,000 to leave quietly, or pursue a tribunal claim that might yield £800,000 of lost earnings, faces a very different calculation than under current rules.
The changed compensation landscape will inevitably push settlement figures higher. Employers accustomed to using the £118,223 cap as a negotiating anchor lose that reference point entirely.
By early 2027, employment tribunals will begin seeing the first claims filed under the new regime. Those cases will establish how tribunals interpret uncapped compensation in practice—how they assess mitigation efforts for senior roles where comparable positions are scarce, how they value bonus components with discretionary elements, how they treat long-term incentive plans with vesting schedules.
Until then, employers operate in a transitional period where current rules still apply, but the imminent shift demands preparation.
For high earners, particularly those in senior roles, the landscape shifts dramatically. Unfair dismissal claims transform from limited-value options into potentially substantial recovery routes. Exit discussions will reflect that changed dynamic, with departing executives holding considerably more leverage than under the previous regime.
The question facing employers isn’t whether the cap removal matters. It demonstrably does. The question is whether organisations will adapt their processes, contracts, and settlement strategies before January 2027 arrives, or scramble to respond once the new regime takes effect and the first seven-figure claims begin landing.
