The End of the Unfair Dismissal Cap: What 1 January 2027 Means for Senior Employee Exits in the UK

For years, UK employers contemplating the exit of a well-paid employee, typically a senior executive, have had a degree of certainty. Even where an employer knows that dismissing without a proper process is likely to be unfair, the potential compensatory award for ordinary unfair dismissal has a ceiling.

On 1 January 2027, that ceiling disappears as the statutory cap on the unfair dismissal compensatory award will be removed. For highly paid employees, this has the potential to significantly change the cost of dismissal and settlement. At the same time, the qualifying period for ordinary unfair dismissal protection will reduce from two years to six months. We will consider the implications of that change in a separate article.

These changes are already affecting behaviour, with some employers making decisions now about exits that might otherwise have been left until 2027. Where a senior departure is already under serious consideration, the difference between an effective date of termination in December 2026 and one in January 2027 could be financially significant.

(For ease, this article refers to “UK employers”, but it should be noted that the changes discussed apply only in England, Scotland and Wales and do not extend to Northern Ireland.)

The current cap and how it affects senior employee exits

A successful unfair dismissal claimant may receive a basic award and a compensatory award, as follows:

• The basic award is calculated in the same way as a statutory redundancy payment, using a capped figure for a week's pay (currently £751 per week).
• The compensatory award covers the financial loss the employee suffers because of the dismissal and is limited to the lower of 52 weeks' gross pay and a statutory maximum (currently £123,543).

For a senior employee earning a salary of several hundred thousand pounds, plus bonus, long-term incentives and benefits, that statutory maximum may be a small fraction of the financial loss resulting from the dismissal, and this has shaped the way some senior exits are handled.

An employer may have concluded that the employment relationship is no longer sustainable, that confidence has been lost or that the organisation requires a change of leadership. It may also conclude that a formal performance or conduct process would be lengthy, disruptive and damaging to the business. In such circumstances, many employers have made a “commercial” decision to end a senior employee’s employment without a full and fair process. In these cases, the employer accepts that the dismissal is probably unfair, but prices the risk at notice pay, contractual entitlements and an ex gratia payment by reference to the cap, and negotiates a settlement agreement on this basis.

The cap therefore does more than limit tribunal awards. It provides a reference point for settlement discussions. Where no credible uncapped claim exists (for example, a discrimination claim), it can place a practical ceiling on what an employer is prepared to offer and can place pressure on the employee to accept that ceiling.

What changes on 1 January 2027?

The cap will be removed, meaning that there will no longer be either a fixed monetary ceiling or a ceiling of 52 weeks’ pay on the compensatory award.

The basis on which compensation is calculated will not however change. A tribunal will continue to assess actual and projected losses caused by the dismissal and evidenced by the claimant. The law currently does not automatically entitle a highly paid employee to compensation equivalent to a year’s remuneration and the removal of the cap will not automatically mean that compensation is awarded in excess of one year. The reform also does not introduce punitive damages and the usual rules on compensation will continue to apply. For example:

• A dismissed employee must take reasonable steps to mitigate (i.e. reduce) their losses, usually by looking for suitable alternative work.
• Where the dismissal is unfair only because of a flawed process, the tribunal may reduce compensation to reflect the chance that the employee would have been fairly dismissed anyway.
• A compensatory award may be reduced where the employee’s conduct caused or contributed to the dismissal.

What does this mean for senior employee exits?

The change is therefore not that every unfair dismissal will suddenly become extremely expensive. Rather, employers will lose the certainty provided by a statutory ceiling. In practice, this could affect senior exits in a number of ways. For example:

• It will be harder to place a reliable value on an unfair dismissal claim at the outset. Much may depend on predictions about the employee’s future employment prospects, the market for comparable roles and the potential value of remuneration that would have been received over an uncertain period.
• There may be a significant difference between the parties' respective valuations of the claim. The employee may contend that it will take 18 months or longer to find equivalent employment. The employer may say that the employee should be able to find a comparable role within a few months.
• There may be greater reason for employers to follow a defensible process before dismissing. A lengthy performance or capability process may be unattractive, but the potential cost of dispensing with that process will become more difficult to quantify.
• The change may also strengthen the negotiating position of some senior employees. Rather than negotiating against a known statutory maximum, an employee may seek to negotiate by reference to a potentially much larger future loss claim.

Looking ahead

The abolition of the cap will not result in significantly higher compensation in every unfair dismissal case. Employees must still prove their loss, take reasonable steps to mitigate it and establish that the loss was caused by the dismissal.

That said, the removal of the cap will change the commercial calculation for senior dismissals. Alongside the reduction in the qualifying period for ordinary unfair dismissal protection from two years to six months, employers will no longer be able to assess their potential ordinary unfair dismissal exposure by reference to a known statutory ceiling. For employers already considering a senior exit, this means that whether the dismissal takes effect before or after 1 January 2027 could be an important consideration.