Unfair dismissal from 1 January 2027: what changes for employers

From 1 January 2027, two of the biggest changes in the Employment Rights Act 2025 take effect. Most employees will be able to claim unfair dismissal after 6 months' service instead of 2 years, and the cap on unfair dismissal compensation is removed. For many small employers, this is the change that matters most.

What is changing

The qualifying period falls to 6 months. For dismissals on or after 1 January 2027, employees will generally need 6 months' continuous service to claim ordinary unfair dismissal, down from 2 years. Anyone who started on or before 1 July 2026 will already have 6 months' service by then.

The compensation cap is removed. For dismissals from 1 January 2027, the Compensatory Award is no longer limited to the lower of the statutory cap (currently £123,543) or 52 weeks' pay. Tribunals will award the employee's actual losses, subject to the usual rules on mitigation and deductions. The Basic Award is unchanged.

Some claims still need no service at all. Dismissals for reasons such as pregnancy, whistleblowing or asserting a statutory right remain automatically unfair from day one, and discrimination claims need no qualifying service.

The Government says future dates remain subject to parliamentary processes and may change.

What this means in practice

Until now, many employers have treated the first 2 years as a lower-risk period. From January 2027, that window shrinks to 6 months. After that, any dismissal will need a fair reason and a fair process, and a successful claim will no longer be capped.

What to do now

• Use probation properly. Set clear expectations at the start, review progress regularly, and make decisions well before the 6-month point.

• Deal with concerns early. Raise performance or conduct issues when they happen, and keep a written record.

• Follow a fair process every time. Investigate, meet the employee, let them be accompanied where they have the right, and offer an appeal.

• Check your policies. Make sure your disciplinary, capability and probation procedures are up to date and followed consistently.

• Train your managers. They are usually the ones who start the process, and early mistakes are hard to fix later.

• Take advice on higher-risk cases. Without a cap, a badly handled dismissal can cost far more than before.

How SignalHR helps

SignalHR's Unfair Dismissal Calculator now applies the rules for the date of dismissal, so you can see how the January 2027 changes affect a potential claim. You can also ask SignalHR how to run a fair probation review, capability process or disciplinary, and build up-to-date policies with the Policy Builder.