Employment Rights Act 2025: Unfair dismissal compensation cap set to be removed
17 December 2025
The Employment Rights Bill has now completed its passage through Parliament, with Royal Assent expected before Christmas. Once enacted, the legislation will become the Employment Rights Act 2025.
Concerns raised in the House of Lords regarding the removal of the statutory compensation cap for unfair dismissal claims caused the Bill’s progress to stall. However, following assurances from the Government and requests from business organisations to conclude the legislative process, peers withdrew their final amendment, allowing the Bill to pass in its current form.
The removal of the cap on compensatory awards for unfair dismissal is one of the most significant changes introduced by the Act. During Lords debates, the Government confirmed it will publish an impact assessment examining the consequences of removing the cap before the relevant provisions come into force.
David Pannick KC made a notable contribution to the debate, arguing that concerns around uncapped compensation are overstated. He highlighted that discrimination claims have long been uncapped without leading to excessive or disorderly awards, suggesting there is no reason to expect a different outcome for unfair dismissal claims.
For employers, the passage of the Bill confirms that substantial reform is on the horizon. Once implemented, the removal of the compensation cap will increase potential financial exposure, particularly in cases involving higher earners. However, the promised impact assessment suggests there may be a lead-in period before the changes take effect, giving employers time to prepare, review policies and monitor developments around commencement and implementation.
Need advice on how the Employment Rights Act 2025 could affect your business?
Our employment law specialists can help you understand the risks, review your dismissal procedures and prepare for the removal of the unfair dismissal compensation cap. Get in touch today for practical, tailored advice.
This article was written by Gabrielle Scriven.
