Unfair Dismissal Compensatory Award: Cap, Calculation, and Reductions

An unfair dismissal compensatory award is the sum an employment tribunal orders your employer to pay to cover the financial loss you suffered because the dismissal was unfair. From 6 April 2026, it is capped at the lower of £123,543 or 52 weeks of your gross pay, and within that ceiling the tribunal awards whatever amount it considers just and equitable.¹ The point of the award is compensation, not punishment: it tries to put you back in the position you would have been in financially had the dismissal never happened.

What the Award Is Meant to Cover

Section 123 of the Employment Rights Act 1996 tells the tribunal to award whatever it considers just and equitable in light of the loss you suffered because of the dismissal.² That phrasing sounds open-ended, but in practice the calculation falls into a few familiar heads: past wage loss, future wage loss, lost pension contributions, lost benefits, reasonable expenses caused by the dismissal, and a small conventional sum for loss of statutory rights.

The statute specifically says your loss includes expenses you reasonably incurred because of the dismissal, and any benefit you could reasonably have expected to keep receiving had the job continued.² That second limb is where most of the money sits, and it reaches well beyond salary.

Past and Future Wage Loss

Past loss is the net income you missed between the dismissal and the tribunal hearing. Tribunals work from net pay after income tax and National Insurance, not gross.³ The arithmetic here is usually straightforward: the tribunal already knows whether you found another job, when you found it, and what it pays.

Future loss is harder, because the tribunal has to estimate how long any ongoing shortfall will last. It considers your age, qualifications, the availability of similar roles, and local labour market conditions. Someone in a common role in a busy city may be expected to find comparable work quickly; an older worker in a specialised field may be allowed a much longer projected gap. This projection often drives the largest single part of the award.

Pension Loss

Pension contributions are easy to overlook and often substantial. If your employer paid into a workplace pension, those contributions stopped on dismissal, and that is a recoverable loss. Tribunals use the judiciary’s Principles for Compensating Pension Loss to work out the figure.³ For a defined contribution scheme the focus is the employer contributions you did not receive. For a defined benefit scheme the analysis is more involved and may call for actuarial evidence.

Benefits and Expenses

Anything of financial value the job provided can be claimed: a company car, private medical insurance, a bonus you had been receiving in a regular pattern, and similar items. Benefits are valued at what it costs you to replace them privately or at their documented value, so a company car might be measured by the cost of a comparable lease or by the P11D figure.

Expenses triggered by the dismissal itself also count. Interview travel, retraining costs, and relocation to take up a new role are the typical examples.

Loss of Statutory Rights

When you start again with a new employer, you have to build up service before certain protections kick in. The qualifying period for an ordinary unfair dismissal claim is currently two years.⁴ To reflect that temporary gap in protection, tribunals add a conventional sum, usually in the range of £500 to £600. The Employment Rights Bill proposes cutting the qualifying period from two years to six months, with the change expected to take effect from January 2027.⁵ If that happens, the conventional award is likely to shrink to reflect the shorter vulnerability period.

The Statutory Cap

However large your proven losses, the compensatory award cannot exceed the lower of £123,543 or 52 times your weekly gross pay.¹ The monetary limit is reviewed every April, and the current £123,543 figure took effect on 6 April 2026, up from £118,223.⁶

For most claimants the 52-week pay figure is the binding limit, because the fixed monetary ceiling only bites on gross earnings above roughly £2,376 a week (£123,543 ÷ 52). Lower earners will almost always run into the one-year salary cap first.

Two categories of dismissal escape the cap altogether. If the dismissal was for making a protected disclosure under section 103A (whistleblowing) or for raising health and safety concerns under section 100, the tribunal can award your full proven loss with no upper limit.¹

Where the Basic Award Fits In

The compensatory award is only part of what a successful claimant receives. Every successful unfair dismissal claim also carries a basic award, calculated separately on a formula tied to age, length of service, and a capped weekly pay figure (£751 per week from April 2026).⁷⁶ The basic award does not depend on proving financial loss and sits on top of whatever compensatory award the tribunal makes.

Reductions That Can Lower the Award

Failure to Mitigate

You cannot simply wait out the period of unemployment and expect the tribunal to pay for it. Section 123(4) applies the common law duty to mitigate, so you must take reasonable steps to find alternative work.² Reasonable does not mean accepting the first offer regardless of pay or seniority, but it does mean showing genuine effort. Keep records of applications, responses, and interviews. If the tribunal decides you failed to mitigate, it will cut the award by the amount you could reasonably have earned during the period of inaction.

Polkey Deductions

A Polkey deduction, named after the House of Lords decision in Polkey v AE Dayton Services Ltd, arises where the dismissal process was flawed but a fair procedure might well have reached the same outcome. The tribunal assesses the probability that you would have been fairly dismissed anyway and reduces the award by that percentage. A 60% chance of fair dismissal within a few months produces a 60% reduction. Where the tribunal is sure fair dismissal would have occurred by a specific date, it may instead limit losses to that date rather than apply a percentage.

The employer carries the burden of showing a fair dismissal was probable, and tribunals will not speculate wildly. But where the underlying reason for dismissal was sound and only the procedure went wrong, a substantial Polkey reduction is common.

Contributory Fault

If your own conduct contributed to the dismissal, the tribunal must reduce the compensatory award by whatever proportion it considers just and equitable.² The percentage can range from modest to 100%, which effectively wipes out the award. Contributory fault also reduces the basic award, so in serious cases both components shrink together. Typical examples include persistent lateness, insubordination, or genuine policy breaches handled through an unfair process.

ACAS Code Adjustment

The ACAS Code of Practice on Disciplinary and Grievance Procedures sets out the minimum standards expected of both sides. Under section 207A of the Trade Union and Labour Relations (Consolidation) Act 1992, the tribunal can increase the compensatory award by up to 25% if the employer unreasonably failed to follow the Code, or decrease it by up to 25% if you did. This adjustment comes after the main calculation and after any Polkey or contributory fault reductions, so it can move the final figure noticeably in either direction.

Benefit Recoupment

If you claimed Jobseeker’s Allowance, income-related Employment and Support Allowance, Universal Credit, or Income Support after losing your job, the government can recover some of those payments from the award.⁸ Recoupment applies only to the part of the award covering lost wages before the hearing. The tribunal identifies that part (the “prescribed element”) and the employer holds it back rather than paying it to you. The Secretary of State then serves a recoupment notice on the employer claiming some or all of the held amount.

The tribunal does not reduce your award to reflect benefits received. It calculates full loss as though no benefits were paid, and the government recovers its payments from the employer separately.⁸ You keep the non-prescribed portion in full; only the prescribed element is split between you and the state according to how much benefit was paid.

Tax on the Award

The first £30,000 of a compensatory award is normally free of income tax under section 403 of the Income Tax (Earnings and Pensions) Act 2003, which covers termination payments not otherwise taxable as earnings. Anything above £30,000 is taxed at your marginal rate, and employer National Insurance also applies on the excess. Elements that count as payment in lieu of notice or any contractual entitlement are treated as taxable earnings from the first pound.

Any ex-gratia or lump sum your employer paid when you left eats into the £30,000 allowance before the tribunal award is applied. In practice, some claimants find a larger share of their compensatory award is taxable than they had expected, because the departure payment already used the tax-free band.

Getting Paid: Interest and Enforcement

Once the tribunal issues its judgment, your employer has 42 days to pay. If the award is still unpaid after that, interest runs automatically from the day following the 42-day window at the Judgments Act 1838 rate, currently 8% per year, accruing daily on the outstanding balance.⁹

If payment still does not arrive, you have several enforcement routes in England and Wales:¹⁰

The Fast Track scheme, where a £71 fee (added to the employer’s debt) brings a High Court enforcement officer to the employer’s premises.
County Court registration, where the tribunal judgment is registered as a County Court Judgment and a bailiff warrant can follow if the employer still does not pay.
Penalty enforcement through the Department for Business and Trade, which issues a warning notice; after 28 days without payment the employer faces a fine and may be publicly named.

In Scotland, you request an extract of the judgment from the tribunal office and instruct a sheriff officer to enforce it.¹⁰ An employer cannot both appeal and resist enforcement at the same time: they have 42 days to lodge an appeal, and enforcement cannot proceed during that window.

1
Legislation.gov.uk. Employment Rights Act 1996 – Section 124
2
Legislation.gov.uk. Employment Rights Act 1996 – Section 123
3
Judiciary UK. Employment Tribunals – Principles for Compensating Pension Loss
4
Legislation.gov.uk. Employment Rights Act 1996 – Part X
5
Acas. Unfair Dismissal
6
Legislation.gov.uk. The Employment Rights (Increase of Limits) Order 2026
7
Legislation.gov.uk. Employment Rights Act 1996 – Part X Chapter II Compensation
8
Legislation.gov.uk. The Employment Protection (Recoupment of Jobseeker’s Allowance and Income Support) Regulations 1996
9
Legislation.gov.uk. The Industrial Tribunals (Interest) Order 1990
10
GOV.UK. Make a Claim to an Employment Tribunal – If You Win Your Case