Unfair dismissal compensation — basic award and compensatory award explained

Learn how compensation is calculated, the current caps, and what factors reduce your payout.

What is the cap on unfair dismissal compensation?

The compensatory award is capped at £123,543 (or 52 weeks' pay, whichever is lower). The basic award has a separate cap of 20 years service at £751/week (approx £22,530). Together they can exceed £136,000, but the compensatory award itself is capped at £123,543.

What is a Polkey reduction?

The Polkey principle reduces your compensation if the tribunal finds the employer would have dismissed you fairly anyway, even if the actual dismissal was unfair. For example, if the employer didn't follow procedure but would have dismissed you if they had, the tribunal reduces your award to reflect this.

What is contributory fault and how does it affect compensation?

If the tribunal finds you contributed to your own dismissal (e.g., by poor performance, misconduct, or breach of contract), they can reduce your compensation by 0-100%. Even if you didn't contribute to the unfair procedure, the tribunal can reduce your award if your conduct was partly responsible for the dismissal.

Can I claim for lost pension contributions in unfair dismissal?

Yes. If you've lost employer pension contributions due to the dismissal, you can claim the value of those contributions. For example, if your employer contributed 8% of salary, you calculate lost contributions for the period until you found comparable work.

How long does it take to get compensation for unfair dismissal?

The tribunal hearing typically happens 3-6 months after the claim is filed (depending on the tribunal's list). The judgment is usually issued within weeks or a few months. If ordered, compensation is typically paid within 2-4 weeks of the judgment. Total time: 6-12 months from claim to payment.

What is interim relief in an unfair dismissal case?

Interim relief is an emergency remedy where the tribunal orders your employer to reinstate you or pay your wages while the case is ongoing. It's only available in dismissal cases (not other claims) and only if there's a strong likelihood you'll win. You must apply for interim relief within 7 days of termination.

Do I pay tax on unfair dismissal compensation?

The first £30,000 of your compensation award is usually tax-free (under Section 188, Employment Rights Act 1996). Any amount above £30,000 is subject to income tax and National Insurance contributions. Always get tax advice from an accountant if your award exceeds this threshold.

How much can you get for unfair dismissal? Learn how the basic and compensatory awards are calculated, the current caps, and what can reduce your payout.

Unfair dismissal compensation — basic award and compensatory award explained

The two components of unfair dismissal compensation

Unfair dismissal compensation consists of two separate awards: the basic award and the compensatory award. They serve different purposes and are calculated differently.

This is calculated similarly to redundancy pay and is based on your age, length of service, and weekly pay.

Years of service × Weekly pay × Age multiplier

Caps on the basic award:

2. The compensatory award

This covers your actual financial loss from the unfair dismissal. It includes lost earnings, lost benefits, lost pension contributions, and other quantifiable losses.

Cap on compensatory award:

Capped at £123,543 (or 52 weeks' pay, whichever is lower). This cap is adjusted annually, so check the current figure when calculating your claim.

Worked example: calculating compensation

Basic Award calculation:

Weekly pay: £751 (capped) × 8 = £6,008

Age multiplier: 38 = 1.0 (age 22-40)

Basic Award = £6,008

Compensatory Award calculation:

Lost earnings (6 months to hearing): £751 × 26 = £19,526

Future loss (3 months until new job): £751 × 13 = £9,763

Lost pension (8% of salary, 9 months): £2,343

Job searching expenses: £500

Compensatory Award = £32,132

Total compensation: £38,140

Basic Award (£6,008) + Compensatory Award (£32,132). Note: This is before tax. The first £30,000 is generally tax-free, but the remaining £8,140 would be taxable.

Important note on this example:

This is a simplified example. The tribunal will also consider reductions for contributory fault (if any), Polkey reduction, and ACAS Code uplift/reduction. The actual award could be higher or lower.

What reduces your unfair dismissal compensation?

Several factors can reduce the tribunal's award. Understanding these helps you assess your realistic compensation.

1. Contributory fault

If you contributed to your own dismissal (poor performance, misconduct, breach of contract), the tribunal reduces your award by 0-100%.

"You were performing badly and had received warnings. The employer dismisses you without proper procedure. The tribunal might reduce your award by 30-50% because you contributed to the dismissal."

2. Failure to mitigate

You are expected to take reasonable steps to find new employment and minimise your financial loss. If you don't look for work, the tribunal reduces your award.

"You're dismissed and take 6 months off before looking for work. The tribunal reduces your award because you should have been job hunting immediately."

If the tribunal finds you would have been dismissed fairly (with proper procedure) anyway, they reduce your award to reflect this.

"You were genuinely redundant, but the employer didn't follow redundancy procedure. The tribunal finds you would have been selected anyway, so reduces your award by 50%."

4. ACAS Code of Practice uplift or reduction

The tribunal can increase your award by up to 25% if the employer breached the ACAS Code of Practice (e.g., failed to follow fair procedures). Conversely, they can reduce it by up to 25% if you breached the code.

"Your employer didn't give you a meeting to explain allegations. This breaches the ACAS Code. The tribunal increases your award by 15%."

All reductions apply to the compensatory award. The basic award can be reduced for contributory fault but not by other factors.

Reinstatement and re-engagement orders

Rather than awarding compensation, the tribunal can order you to be reinstated or re-engaged. These remedies are rare but powerful.

The tribunal orders the employer to reinstate you in the same job on the same terms. You're treated as if the dismissal never happened. You're owed back pay from the date of dismissal.

Rarely. The tribunal only orders reinstatement if it's practicable and you want it.

The tribunal orders the employer to re-engage you in a similar job or another job on similar terms. It's less formal than reinstatement.

If reinstatement is impracticable but re-engagement is feasible (e.g., different role or office).

If the employer refuses reinstatement or re-engagement:

The tribunal awards an additional remedy: compensation of between 26-52 weeks' pay (at 26 weeks minimum). This is on top of any compensatory award already made.

Tax treatment of unfair dismissal compensation

Unfair dismissal compensation has specific tax treatment. Understanding this helps you know what you'll actually keep.

The £30,000 exemption

The first £30,000 of your unfair dismissal award is generally tax-free under Section 188 of the Employment Rights Act 1996. This covers:

Amounts above £30,000

Any compensation above £30,000 is subject to income tax and National Insurance contributions. This means if your compensatory award is £50,000, you pay tax on the excess £20,000.

The £30,000 exemption is specific to unfair dismissal. It doesn't apply to discrimination compensation, which is fully taxable above £30,000 in some cases. Always get tax advice from an accountant.

Example: If your unfair dismissal compensatory award is £60,000, you keep £40,000 tax-free (basic + first £30,000) and pay tax on £20,000.

Frequently asked questions

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Employment Rights Act 1996