Employers of high earners vulnerable to compensation cap lift
Employers of people on high salaries are becoming increasingly vulnerable to costly employment tribunal claims in advance of the current cap on compensatory awards for unfair dismissal being lifted.
New figures have revealed that about 840,000 PAYE taxpayers now earn more than the current maximum compensation available for unfair dismissal.
Analysis of HMRC data by TWM Solicitors shows that 840,000 people earned more than £123,543 in the 2025/26 tax year – the current cap on compensatory awards for unfair dismissal. From January 2027, however, the cap is due to be removed under the Employment Rights Act 2025, significantly increasing the financial exposure for employers.
Until then, compensatory awards are limited to the lower of one year’s gross salary or £123,543, meaning highly paid employees have less financial incentive to pursue unfair dismissal claims. Once the limit is abolished, employers could face substantially larger claims from senior executives and other high earners.
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Anthony Wilcox, partner in the employment law team at TWM Solicitors, said: “Removing the compensation cap is likely to dramatically increase employers’ exposure to high-value employment tribunal claims. They could be faced with some exceptionally large claims from senior employees who earn well above the current limit.”
He added: “This is going to be particularly problematic for employers in financial services and the tech sector where remuneration can be very high.”
Wilcox warned that the impact would extend beyond highly paid executives.
“The consequences of this change will not just be felt in cases involving high earners. Cases brought by employees earning average salaries will also see larger awards where there are ongoing losses or the loss of valuable benefits, such as those with final salary pension schemes.”
He added: “Awards could reach levels that would have a serious impact on the profitability of some employers, especially smaller businesses.”
Alongside the removal of the compensation cap, the Employment Rights Act will introduce another major change from 1 January 2027, allowing employees with at least six months’ service by the end of 2026 to qualify for ordinary unfair dismissal rights much earlier than under the current rules.
Employment lawyers believe many businesses are already adjusting their workforce planning ahead of the reforms.
James Townsend, head of employment at Payne Hicks Beach, said: “Many employers are likely to bring forward probation reviews and, in some cases, consider shorter probation periods to avoid employees benefiting from the new protections from 1 January 2027.”
Townsend believes the changes could alter employer behaviour without necessarily improving job security for workers.
“For employees, the reforms provide earlier legal protection, but that does not necessarily translate into greater job security. Some employers may simply make probation and performance decisions sooner, meaning difficult conversations happen earlier rather than later,” he said.
Wilcox warned that more high-value claims could place further strain on an already overstretched system. “If, as expected, the reforms lead to an increase in high-value unfair dismissal claims, this is almost certainly going to place further strain on an employment tribunal system that is already struggling with significant backlogs and difficulties recruiting judges.”
According to the Financial Times, businesses are already taking action to reduce exposure to the new laws with finance and tech groups “rushing to fire underperforming executives, cut headcount and toughen probation processes for new hires.”
Alex Mizzi, legal director in the employment team at Howard Kennedy, told the FT: “They are trying to clear out deadwood in senior leadership teams before it gets more expensive.”
Sarah Henchoz, global head of employment at A&O Shearman, told the newspaper that employers were taking action from 1 July (six months before the January 2027 implementation) “to ensure they avoid excessive costs that can arise from terminations and to take advantage of what is currently an employer-friendly legal position”.
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