UK Unfair Dismissal Reform from January 2027: Six-Month Qualifying Period, Removal of Compensation Cap, and What Employers Must Prepare For

The Employment Rights Act 2025 received Royal Assent in late 2025 after a prolonged parliamentary passage as the Employment Rights Bill. Among its most significant provisions are the reforms to unfair dismissal protection, which take effect from 1 January 2027. The qualifying period for ordinary unfair dismissal claims drops from two years of continuous employment to six months, and the statutory cap on compensation for unfair dismissal is removed entirely. These changes represent the largest shift in UK unfair dismissal law in decades and require serious preparation from employers.

This article sets out the key changes, how the transitional provisions work, and what employers should be doing now to prepare.

The Current Position

Under the Employment Rights Act 1996, as it stands before the 2025 Act's reforms take effect, an employee must have at least two years of continuous employment with the same employer before they can bring an ordinary unfair dismissal claim. This qualifying period was increased from one year to two years by the Unfair Dismissal and Statement of Reasons for Dismissal (Variation of Qualifying Period) Order 2012, which came into force on 6 April 2012. During the two-year qualifying period, employers have had relatively wide freedom to terminate employment, provided the dismissal does not fall within the categories of automatically unfair dismissal (which carry no qualifying period) or amount to unlawful discrimination.

Compensation for unfair dismissal currently consists of a basic award (calculated in the same way as a statutory redundancy payment, based on age, length of service, and weekly pay subject to a statutory cap) and a compensatory award. The compensatory award is subject to a statutory cap, which is the lower of 52 weeks' pay or a prescribed maximum (currently set at £115,115 for dismissals on or after 6 April 2025). The cap on the compensatory award has been a feature of the system since 1971 and has given employers a degree of certainty about their maximum financial exposure.

What Changes from 1 January 2027

The Employment Rights Act 2025 makes two headline changes to the unfair dismissal regime.

First, the qualifying period for bringing an ordinary unfair dismissal claim is reduced from two years to six months of continuous employment. The government initially signalled that unfair dismissal protection would become a day-one right, but during the Bill's passage through Parliament, the proposal was revised. The six-month period is intended to allow employers to continue using probationary periods to assess new employees before full unfair dismissal protection applies.

Second, the statutory cap on the compensatory award for unfair dismissal is abolished. From 1 January 2027, there will be no upper limit on the compensatory award that an employment tribunal can make. The compensatory award will continue to be assessed on the basis of what the tribunal considers "just and equitable in all the circumstances," but without any statutory ceiling. This means that high earners who are unfairly dismissed could receive substantially larger awards than under the current system, where the cap limits the compensatory award regardless of actual losses.

Transitional Provisions

The government has adopted a "commencement approach" rather than a "savings approach" for the transition. In practical terms, this means that on 1 January 2027, any employee who has at that point completed six months of continuous employment will immediately gain unfair dismissal protection, regardless of when they started their employment. Employees who started work on or before 2 July 2026 and remain in continuous employment on 1 January 2027 will have completed six months and will be covered by the new rules from that date.

This creates an important planning window for employers. Between now and 1 January 2027, decisions about probationary dismissals should be made with the awareness that employees who remain in employment beyond 2 July 2026 will acquire unfair dismissal rights on 1 January 2027. Employers who have historically relied on the two-year qualifying period as a buffer should begin treating dismissals during the first six months with greater procedural care.

Automatically Unfair Dismissal Remains Unchanged

The categories of automatically unfair dismissal continue to require no qualifying period. These include dismissals related to pregnancy, maternity, or family leave; dismissals for making a protected disclosure (whistleblowing); dismissals for asserting a statutory right; dismissals connected with trade union membership or activities; and dismissals for exercising the right to request flexible working. The Employment Rights Act 2025 separately expanded the whistleblowing framework by making sexual harassment an explicit qualifying disclosure from 6 April 2026, but these changes operate independently of the unfair dismissal qualifying period reform.

Impact on Probation Periods

The retention of a six-month qualifying period means that employers can continue to use probationary periods of up to six months to assess new employees with relatively limited unfair dismissal risk. Dismissals within the first six months will remain low-risk from an ordinary unfair dismissal perspective, though employers must still ensure that such dismissals do not amount to automatically unfair dismissal or unlawful discrimination. In practice, a well-documented six-month probation process with clear objectives, regular reviews, and a structured decision at the end of the probation period will remain a defensible approach.

Where employers currently use probation periods longer than six months, they should review whether this remains appropriate. An employee who is still on probation at the six-month mark will now have unfair dismissal protection, which means that any dismissal at or after six months must be for a potentially fair reason (capability, conduct, redundancy, statutory illegality, or some other substantial reason) and must follow a fair procedure. Extending probation beyond six months without making a decision will no longer carry the same low level of risk that it did under the two-year qualifying period.

Removal of the Compensation Cap

The removal of the statutory cap on the compensatory award is likely to have the greatest financial impact on employers. Under the current system, even a high earner who is unfairly dismissed and suffers significant career damage is limited to the prescribed cap (currently £115,115 or 52 weeks' pay, whichever is lower). From 1 January 2027, the compensatory award will be uncapped, and tribunals will assess loss on a "just and equitable" basis without a ceiling.

For most unfair dismissal claims, the practical impact may be limited. The median compensatory award in 2024/25 was around £7,000-£9,000, and the vast majority of awards fall well below the current cap. But for senior employees, long-serving employees, or employees in specialised roles where re-employment takes a long time, the removal of the cap could result in awards many times higher than the current maximum. Cases involving high earners who suffer lengthy periods of unemployment or who are forced to accept significantly lower-paid roles could see compensatory awards running into hundreds of thousands of pounds.

This change also affects the dynamics of settlement negotiations. Under the current system, the cap provides a natural anchor for settlement discussions. Without it, the range of potential outcomes in tribunal proceedings widens significantly, which may make it harder for parties to agree on settlement figures and could increase the number of claims that proceed to a full hearing.

What Employers Should Do Now

Although 1 January 2027 is still several months away, the transitional provisions mean that employers need to start preparing now. Key steps include reviewing probation policies to ensure they are structured around a six-month period with clear objectives, regular check-ins, and documented assessments; training line managers on the requirement to follow fair procedures for all dismissals after six months, including capability and conduct dismissals; reviewing dismissal procedures to ensure they comply with the Acas Code of Practice on Disciplinary and Grievance Procedures, since procedural failings will carry greater financial risk without a compensation cap; and budgeting for higher potential exposure in employment tribunal claims, particularly for senior or high-earning employees.

Employers should also consider whether their existing employment contracts need updating. Contracts that refer to a two-year probation period or that assume a two-year qualifying period for certain benefits or protections may need to be revised.

For advice on UK employment law compliance, dismissal procedures, or employment tribunal claims, contact LexForm.