Welcome to this month's briefing for HR teams and in-house employment counsel – bringing you this month’s employment law highlights in an easy-to-read package.

Employment Rights Bill: big changes to unfair dismissal 

The ERB has (finally) been passed by Parliament, and become the Employment Rights Act 2025. There are two very significant changes to unfair dismissal to note:

Qualifying period

We have written previously about the Government’s difficulty in implementing in legislation its commitment to “day one” unfair dismissal protection for employees. As we flagged in last month’s edition, the House of Lords repeatedly refused to accede to the Commons, and continued to push for a reduced qualifying period as an alternative to the complex statutory probation period that the Government had suggested. 

In a surprising development, the Government announced it would adopt the Lords’ approach, scrap the statutory probation period concept, and simply reduce the qualifying period for ordinary unfair dismissal claims from two years to six months. Now that the Bill has been passed, this promises to be a far simpler structure for employers to navigate, although the reduction will still place a significant emphasis on recruitment and early assessment processes.

Compensation

The Government’s announcement also contained this remark: “To further strengthen these protections, the Government has committed to ensure that the unfair dismissal qualifying period can only be varied by primary legislation and that the compensation cap will be lifted.” The underlined words are new. Although Labour included a commitment to remove the cap in an early iteration of its reform proposals during the last election, that did not feature in its manifesto, or in any draft of the Employment Rights Bill. At present, compensation for unfair dismissal is capped at the lower of one year’s gross basic salary, or £118,223. 

The consensus amongst commentators was that the underlined words most likely signalled an intention to remove the one year’s gross basic salary element, but maintain the fixed cap. The consensus was entirely wrong: the Government in fact asked the Lords to agree to remove the cap altogether. After a further round of Parliamentary ping-pong between the Commons and Lords, that has now passed. 

The removal of the cap represents one of the most radical reshapings of the UK employment law landscape in a generation, dramatically increasing the potential exposure for employers. The potential positive is that it will remove the incentive for higher earners to try to create whistleblowing and/or discrimination claims in order to assert uncapped claims, but the practical ramifications will need some time to play out in practice.

Non-compete reform

Successive governments have considered reform to non-competes and other post-termination restraints in 2016 and 2020, each time concluding (either explicitly or implicitly) that there was no pressing need for statutory intervention in a field that benefits from over 300 years of case law, and that allows common law courts freedom to strike a balance between competing interests. This government has launched yet another enquiry into this area, expressly using a changed international view of non-competes as an added impetus. 

For a full discussion of the government’s proposals, please read our separate article.

HMRC’s new whistleblowing reward scheme

Whistleblowing is an increasingly important area of employment law. In an interesting development, HMRC has finally established a reward scheme for whistleblowers who materially aid in the recovery of unpaid tax. 

For a full discussion, please read our separate article.

Salary sacrifice pension contributions

The government has announced changes to the National Insurance contributions (NICs) position for pension contributions made through salary sacrifice, intended to take effect from 6 April 2029. As introduced on 4 December, the National Insurance Contributions (Employer Pensions Contributions) Bill proposes that:

• the current exemption from employee NICs for employee pension contributions made under salary sacrifice will be capped at £2,000 per tax year; and
• any employee pension contributions made via salary sacrifice in excess of £2,000 per tax year will be subject to both employer and employee NICs.

The announcement does not change the NIC treatment of employer pension contributions, including genuine employer contributions made as a result of a salary sacrifice arrangement, which will continue to be exempt from NICs. The policy focus is on the employee NICs advantage arising when employees elect to reduce their cash pay in exchange for a corresponding employer pension contribution.

The government and HMRC are expected to publish further guidance on the changes before April 2029. In particular, further detail will be needed on a number of practical issues, including:

• how the £2,000 cap will be monitored and measured during the tax year;
• whether the cap will apply per employment or across all employments; and
• the extent to which HMRC will expect employers to monitor and intervene where employees approach or exceed the cap during the tax year.

The existing optional remuneration arrangements (OpRA) rules continue to apply to salary sacrifice arrangements generally. Under OpRA, arrangements under which an employee gives up cash remuneration in return for a benefit are subject to specific tax and NIC valuation rules. Employer-only pension contributions remain outside the scope of OpRA where employees have no option to receive cash instead, and the Bill as introduced does not change this position. Subject to the progress of the legislation and any further government announcements, genuine employer-only pension contributions are therefore expected to continue to fall outside OpRA and remain fully exempt from NICs, provided they are not linked to any salary reduction or cash alternative options.

Between now and April 2029, employers currently operating salary sacrifice arrangements for employee pension contributions will want to consider how the changes will affect both them and their employees. Where a significant number of employees are likely to be affected by the cap, employers may wish to consider whether moving to a genuine employer only pension contribution structure would be appropriate.

Employers will also need to communicate the changes to the workforce, and document, and agree with the employees, any changes to the existing arrangements. While the headline change is relatively straightforward, the proposed cap represents a significant shift in how NICs relief interacts with salary sacrifice for pension contributions, and the operational mechanics will matter in practice, particularly where employers currently share NICs savings with employees.

Employers may therefore wish to begin factoring these forthcoming changes into longer-term reward strategy, payroll system planning and pension design reviews, while retaining flexibility to respond to the development of relevant legislation and further guidance ahead of April 2029.

For more information on other changes to employment tax announced in the recent Autumn Budget, please read our separate article.