This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
A comprehensive guide to understanding basic and compensatory awards in UK employment tribunals. Explains how each award is calculated, statutory caps and limits, what losses tribunals consider, mitigation and adjustments, time limits for unfair dismissal claims and practical examples to help employees and employers navigate compensation outcomes in England and Wales.
When an employment tribunal in England and Wales finds that an employee has been unfairly dismissed, it may award compensation. Compensation in that context normally comprises two distinct elements: a basic award and a compensatory award. These awards have different legal purposes and are calculated in different ways. Knowing the difference between them helps employees, employers and advisers understand how tribunal awards are determined, what rights and limits apply, and how compensation can vary in practice. This article explains these concepts in accessible language, outlines legal principles and statutory rules, and provides practical context including time limits, calculation issues, and common questions.
What Are Basic and Compensatory Awards?
Basic Award
The basic award is a statutory minimum element of compensation in many unfair dismissal claims. It is calculated using a set formula broadly similar to statutory redundancy pay and is designed to reflect the employee's length of service, age and pay at the date of dismissal.
Compensatory Award
The compensatory award is intended to compensate the employee for the financial loss suffered as a result of unfair dismissal, such as lost earnings and benefits. It is not based on a fixed formula but is calculated based on actual and anticipated losses, subject to statutory constraints and the tribunal's discretion.
Legal Basis: Statutory Framework
The requirement for both awards arises from the Employment Rights Act 1996. Section 118 of the Act provides that where a tribunal makes an award of compensation for unfair dismissal, it shall consist of both a basic award (calculated under sections 119–122) and a compensatory award (calculated under sections 123–124).
How the Basic Award Is Calculated
Formula and Factors
The basic award is calculated by reference to:
- Length of continuous service with the employer (capped at 20 years).
- Age during each year of service.
- A week's pay, subject to a statutory maximum.
Tribunal judges apply the following multipliers:
- 0.5 week's pay for each year during which the employee was under 22.
- 1 week's pay for each year during which the employee was between 22 and 40.
- 1.5 weeks' pay for each year during which the employee was 41 or over.
Caps and Limits
- A week's pay used for the purposes of calculating the basic award is capped (for example, at £719 from 6 April 2025).
- There is also an overall cap on the basic award, often around £21,570 (20 years' service at the statutory maximum), though figures are updated periodically.
Reductions
In limited situations, tribunals can reduce the basic award if it is just and equitable to do so, for example where an employee's own conduct before dismissal makes a large award inappropriate.
How the Compensatory Award Is Calculated
Purpose and Principles
The compensatory award is intended to put the claimant in the financial position they would have been in if the dismissal had been fair, insofar as this is practicable. It covers both past and future losses attributable to the dismissal. The tribunal determines the amount it considers just and equitable in all circumstances.
Losses Considered
Tribunals typically assess losses such as:
- Net loss of earnings from dismissal up to the hearing.
- Future loss of earnings pending re‑employment.
- Loss of contractual benefits, including pension contributions, bonuses, or health‑related benefits.
- Expenses reasonably incurred as a result of dismissal.
Tribunals will require evidence of actual and reasonably anticipated financial loss. Claimants must present a schedule of loss and supporting evidence to justify the figures they seek.
Statutory Limits and Exceptions
Cap on Compensatory Awards
In most unfair dismissal cases, the compensatory award is capped at the lower of one year's gross pay or a maximum statutory amount that is periodically reviewed (e.g., £118,223 from 6 April 2025).
The purpose of the cap is to provide predictability and reflect the limited compensatory nature of awards in unfair dismissal claims. Tribunals consider mitigation and other factors when calculating actual loss up to this limit.
Exceptions to the Cap
There are exceptions where the compensatory award may be uncapped, notably:
- Dismissal related to whistleblowing (protected disclosure).
- Dismissal connected with health and safety activities.
- Dismissal linked to trade union activities (in some circumstances).
These exceptions reflect statutory policy recognising the public interest in protecting certain rights.
Differences Between Basic and Compensatory Awards
| Feature | Basic Award | Compensatory Award |
|---|---|---|
| Purpose | Statutory minimum compensation for dismissal | Compensation for actual financial losses |
| Calculation | Formula based (service, age, weekly pay) | Discretionary based on loss evidence |
| Caps | Yes (statutory limits on weekly pay and total award) | Yes (usually one year's pay or statutory maximum) |
| Dependency | Usually payable if unfair dismissal found | May be reduced or adjusted for mitigation, contributory fault |
Mitigation and Adjustments
Tribunals expect employees to mitigate their losses by seeking alternative employment after dismissal. If the claimant has found new work, or could reasonably have found work, the compensatory award may be reduced accordingly. Likewise, if a claimant's conduct contributed to their dismissal, the award may be reduced to reflect contributory fault.
Time Limits and Procedure
To receive either award, an employee must bring an unfair dismissal claim to an employment tribunal generally within three months less one day of the effective date of termination. Before issuing a claim, the tribunal process usually requires Early Conciliation through ACAS. Missing time limits may result in claims being struck out. (This procedural step is standard in tribunal claims.)
Practical Examples
Example A: Mid‑Length Service
An employee aged 45 with 10 years' service and a gross weekly pay of £700 is unfairly dismissed:
- Basic award: 10 years × 1.5 weeks × £700 = £10,500 (capped by statutory limits).
- Compensatory award: Based on actual losses (e.g. 26 weeks out of work at net pay), up to statutory cap. Tribunal assesses evidence to determine the exact figure.
Example B: Short‑Service Mitigated Loss
An employee dismissed after 3 years secures new employment quickly at a similar salary. The tribunal may award:
- A modest basic award in line with service and pay.
- A reduced compensatory award reflecting limited period of financial loss.
Common Questions
Is compensation punitive?
No. Tribunal compensation for unfair dismissal is compensatory, not punitive. It focuses on financial loss, not punishment of the employer.
Can awards be increased?
Under certain conditions, such as failure to follow agreed procedures like the ACAS Code of Practice on disciplinary and grievance procedures, a tribunal may increase a compensatory award by up to a statutory percentage.
Can awards be reduced?
Yes. Awards may be reduced for contributory fault or failure to mitigate losses.
Key Takeaways
In unfair dismissal cases, a tribunal typically awards two distinct types of compensation: a basic award based on statutory formulae and a compensatory award reflecting actual financial loss. Basic awards resemble statutory redundancy pay, while compensatory awards aim to make good the economic impact of dismissal, subject to statutory limits and tribunal discretion. Understanding the differences between these awards - and how they are calculated, limited and adjusted - helps claimants and respondents prepare for tribunal proceedings, set realistic expectations about potential remedies, and navigate procedural requirements effectively.
