UK · Employment rights

Constructive dismissal compensation

A successful UK constructive dismissal claim is worth the basic award (calculated like statutory redundancy pay), plus the compensatory award (actual loss of earnings and benefits, capped at the statutory maximum). This page walks through how each is calculated, the tax treatment, and three worked examples.

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The two awards

A successful unfair dismissal claim — and constructive dismissal claims are heard as unfair dismissal claims — yields two payments. The basic award is fixed by formula and depends on length of service, age and weekly pay. The compensatory award is variable and depends on the actual financial loss caused by the dismissal.

On top of those, additional sums often come into the final figure: unpaid notice pay (or PILON if you resigned without notice and were entitled to walk away), accrued but untaken holiday pay, and contractual bonuses owed. For claims that overlap with discrimination, an injury to feelings award is also available under the Vento bands.

Basic award

The basic award uses the statutory redundancy formula in sections 119 to 122 of the Employment Rights Act 1996. Each year of service is multiplied by a weekly pay figure. The multiplier is:

  • Half a week for each year worked under age 22.
  • One week for each year worked aged 22 to 40.
  • One and a half weeks for each year worked aged 41 or over.

Two caps apply. The maximum number of years counted is 20, working backwards from the dismissal date. The weekly pay is capped (currently £700 per week for dismissals on or after 6 April 2024); the cap is uprated each April. The maximum basic award at the current cap is therefore 20 × 1.5 × £700 = £21,000.

The redundancy pay calculator does the basic-award maths exactly. The figure it produces for a redundancy is the same figure you would get for a constructive dismissal basic award.

Compensatory award

The compensatory award covers the actual financial loss caused by the dismissal. The tribunal calculates this by comparing what the employee would have earned had the dismissal not happened with what they actually earned afterwards. The difference is paid by the employer.

Components typically included are: net loss of earnings for the period of unemployment, loss of benefits (private medical, pension contributions, bonuses, share schemes), and reasonable expenses incurred in looking for new work. Future loss is included where the new job pays less than the old, again capped.

For claims presented on or after 6 April 2024 the statutory cap is £115,115 or 52 weeks’ gross pay, whichever is the lower. The cap is on the compensatory award only; the basic award is uncapped within the statutory formula. The figure is uprated each April.

Notice pay

If you resigned with notice, your notice pay is part of your contractual entitlement and is paid as normal — it is not part of the tribunal award. If you resigned without notice in response to a breach so serious that you were entitled to leave immediately, the tribunal can award damages for the lost notice period. The amount is gross pay for the contractual notice period, less any earnings from new employment that started before notice would have ended.

The PILON calculator models the gross value of the unworked notice. The final pay estimator gives a rough net figure.

Holiday pay

Accrued statutory holiday must be paid in your final pay packet, regardless of the route by which you left. If your employer failed to do this, the tribunal will add the unpaid amount to the award. Contractual holiday above the statutory minimum follows whatever the contract says, which is often less generous (use it or lose it) but sometimes the same.

The holiday entitlement calculator works out how many accrued days you should have been paid for.

Loss of earnings

Loss of earnings is the heart of the compensatory award. The tribunal looks at your pre-dismissal salary, your ability to mitigate (find a comparable job), and the period over which the loss is sustained.

The duty to mitigate is real. The tribunal expects you to look for work, accept reasonable offers and not hold out for an unrealistic role. Refusing a comparable position will reduce the award. Keeping records of job applications, interviews and outcomes is important evidence.

If the new job pays less than the old, the tribunal can award future loss for a reasonable transition period. The length depends on the seniority of the role, the state of the local labour market and the employee’s age and qualifications.

Tax treatment

The first £30,000 of a termination payment that is not earnings can be paid free of income tax under section 403 of the Income Tax (Earnings and Pensions) Act 2003. That covers most of a typical unfair dismissal award: the basic award, the compensatory award for loss of earnings, and any ex-gratia element from a settlement.

Payments that are earnings — notice pay (PILON), accrued holiday pay, contractual bonuses — are taxable in full under PAYE. The 2018 PILON tax rule (Post-Employment Notice Pay, PENP) ensures that the value of the unworked notice period is always taxed as earnings, even if the employer dresses it up as ex-gratia.

Discrimination awards have their own treatment. The injury to feelings element is normally tax-free under the long-standing HMRC concession on payments compensating for non-pecuniary loss. Other heads (economic loss) follow the £30,000 rule.

Worked example 1: junior employee, short claim

Employee aged 30, two years of service, weekly pay £450, resigns in response to a fundamental breach and finds comparable work after 8 weeks at the same pay.

Basic award: 2 years × 1 week × £450 = £900.

Compensatory award: 8 weeks of lost net pay at, say, £335 net = £2,680, plus £100 in job-search expenses. Total £2,780.

Holiday pay owed at termination, suppose 4 days at £90 per day = £360, paid through PAYE.

Total: roughly £4,040. Of which the basic and compensatory elements (£3,680) are inside the £30,000 tax-free allowance. The £360 holiday pay is taxed at source.

Worked example 2: mid-career employee, longer gap

Employee aged 42, eight years of service, weekly pay £900 (above the £700 cap), resigns and is out of work for 6 months before finding a comparable role at the same pay.

Basic award: 7 years aged 22-40 (£700 × 1 × 7) = £4,900, plus 1 year aged 41+ (£700 × 1.5 × 1) = £1,050. Total basic award £5,950.

Compensatory award: 26 weeks of lost net pay at £650 net = £16,900, plus loss of pension contributions (employer 5% of gross £900 × 26 = £1,170) plus job-search expenses £200. Total compensatory £18,270.

Notice pay: contractual notice was 1 month; employer paid it in full as PILON, taxed via PAYE.

Total tribunal award: roughly £24,220, all inside the £30,000 tax-free allowance. The PILON and holiday pay flow separately through payroll.

Worked example 3: senior employee, hit the cap

Employee aged 55, twenty years of service, weekly pay £2,000 (well above the cap), resigns and is out of work for 18 months before finding a role at £1,400 per week.

Basic award: capped at 20 years × 1.5 × £700 = £21,000.

Compensatory award: 78 weeks at £1,300 net pre-tax difference = a notional £101,400, plus pension and benefit loss. The total compensatory loss exceeds the cap. The tribunal awards the statutory cap (lower of £115,115 or 52 weeks’ gross pay).

52 weeks of gross pay is £104,000, so the cap is £104,000 (the lower of the two). Total award: £21,000 basic + £104,000 compensatory = £125,000.

Tax: £30,000 tax-free, £95,000 taxed at source as additional income, mostly at the higher rate. The tax-free band is not enough to shelter the full award for senior employees. Pension contributions or structured settlements can sometimes reduce the effective rate.

Useful calculators

Related reading

Frequently asked questions

How is the basic award calculated?
The basic award uses the same formula as statutory redundancy pay. Each year of service is multiplied by a weekly pay figure, with the multiplier depending on your age in the year of service: half a week for years worked under age 22, one week for years aged 22 to 40, and one and a half weeks for years aged 41 and over. The weekly pay is capped (currently £700 per week for dismissals on or after 6 April 2024) and the maximum number of years counted is 20.
What does the compensatory award cover?
The compensatory award covers actual financial loss caused by the dismissal: lost net pay, lost benefits (private medical, pension contributions, bonuses), and any expenses incurred looking for a new job. It runs from the dismissal date until you find a comparable job, subject to the statutory cap. For claims presented on or after 6 April 2024, the cap is £115,115 or 52 weeks' gross pay, whichever is the lower.
Is constructive dismissal compensation taxed?
Most of a successful award is tax-free up to £30,000, under the same rule that applies to redundancy and termination payments generally. Payments that represent earnings the employee would have received during the notice period (PILON), accrued holiday pay, or contractual bonuses are usually taxable in full. The £30,000 allowance applies to the tax-free element of the lump sum, not to every component.
Can I get an injury to feelings award?
Not in a standard unfair dismissal claim. Injury to feelings awards are available where the claim is under the Equality Act 2010 (discrimination, harassment) rather than the Employment Rights Act 1996. If your constructive dismissal arises from discrimination, you can run both claims together and recover both compensatory loss and an injury to feelings award. The injury to feelings amount uses the Vento bands.

General information about UK employment law and tax, not legal or tax advice. Awards are fact-sensitive and depend on the tribunal’s view of mitigation. For your specific situation, contact ACAS or an employment-law solicitor.