Employers handling salary deductions are responsible for several aspects. For example, they must manage legal compliance with statutory deductions, as well as any voluntary deductions agreed with employees. The relevant legal framework comes from the Employment Rights Act 1996, which stipulates that deductions are only permitted if required by law, stated in the employment contract, or agreed in writing by the employee. An employer has numerous responsibilities, including registering with HMRC and operating the Pay As You Earn (PAYE) system to deduct and pay Income Tax and National Insurance contributions (NICs). They must automatically enrol eligible employees into a workplace pension scheme, ensure they’re paying the National Minimum Wage or National Living Wage, provide payslips that cover how pay was calculated, and keep payroll records for a minimum of three years and present them upon HMRC’s request. There are mandatory deductions, such as Income Tax (PAYE), National Insurance Contributions (NICs), workplace pension contributions, student loan repayments, and court-ordered deductions. Voluntary deductions consist of additional pension contributions, employee benefits, repayment of loans, and union dues or charitable donations.
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Salary deductions
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Pay & benefits are what your employees receive for the work they do for your company.
The following are mandatory benefits employees must receive, retirement pay, holiday pay, maternity/paternity pay, and sick pay, as well as their salary.
There are other types of benefits you can give your employees, such as bonus schemes, company cars, employee expenses, and share schemes.
Peninsula can offer you expert advice on pay & benefits, ensuring you pay your staff correctly and avoid claims being raised against you.
Yes, if you don't pay your staff their legal entitlements claims can be raised against you. This could lead to financial damages being paid,
Pay inequality has been a prominent, ongoing issue in the UK economy for years. Not only through gender, but the government has recently found disparities within ethnic and disability demographics.
When it comes to paying staff, employers must ensure the right amounts are given – especially for those not on full-time contracts. Pro rata ensures these employees are compensated correctly; and that includes wages, holidays, and benefits.
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Employees and workers receive legal protection from an unauthorised salary deduction.
But there are certain occasions when you can make allowable deductions. It’s important to follow the right steps, otherwise you could end up breaking the law.
In this guide, we take a look at how you can stay compliant while making deductions from wages in the UK.
There are three conditions in which you can make a pay deduction. These are:
It’s required by British law—statutory deductions.
The employee/worker has the deduction stated in their contract—you will need to show your employee has seen the contract and agreed to it.
The employee/worker has consented to the deductions—you employee would have to agree to the deduction at the time you want to make it, even if it isn’t in the contract.
But what are statutory deductions? In the UK, these are the likes of income tax, National Insurance contributions, pension contributions, and paying off a student loan.
Legal payroll deductions
There are exemptions to the above rules. One example is if there’s been a . With this one, you’re legally allowed to take the money back without meeting any of the above criteria.
To respect your employee, you should discuss with them the overpayment. Then you could reach an amicable agreement about how to have the money returned (often through monthly deductions from future pay slips).
Do remember that in some lines of work, such as retail, there are rules in place that stop you from deducting more than 10% from the gross amount of any wage. But the rules are different if it is the last wage to pay when the employee is leaving.
Advance deduction on payslip
Another possibility is a deduction to cover a previous wage advance. This is where an amount gets removed from an employee/worker’s payslip to cover money previously advanced to them.
This type of action is commonplace for retail clerks, loan officers, and sales jobs. If they’re on commission and have no established salary, these jobs may include a draw that works in a cycle.
With this, an employee/worker has extra pay one month, but it gets deducted in future payslips. This draw could work, for example, with a salesperson if they don’t earn commission. Once they’ve made this money back, they’ll then receive an advance deduction.
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The Deduction from Wages (Limitation) Regulations 2014 policy changed deductions from holiday pay. When making a claim for backdated deductions from wages, there’s now a two-year cap in place. So, yes, that means you only have a two-year limit to make a claim.
If you have an employee who has taken too much annual leave, you can deduct the excess holiday pay from their pay (as long as you have a provision in your contract stating so).
FAQs: Salary deductions
When can an employer make deductions from an employee’s pay?
There are several instances where an employer can make deductions from an employee’s pay. Firstly, if it’s required to do so by law, like tax and National Insurance, if it’s stated in the employment contract, or if the employee has given written consent.
Does an employer need written consent from an employer for every deduction?
For most voluntary deductions, such as union fees, pension contributions above auto-enrolment minimums and other benefits, prior written agreement from the employee is required.
Can a deduction take an employee’s pay below the National Minimum Wage?
Deductions mustn’t reduce an employee’s pay below the National Minimum Wage rate. However, there are exceptions. For example, tax and National Insurance contributions, repayment of an advance or loan, accidental overpayments, or an agreed charge for accommodation provided by an employer.
What should an employer do if they accidentally overpay an employee?
Employers have the right to reclaim overpayments. Though make the employee aware urgently and agree on a repayment plan. If an agreement can’t be found, employers can recover the money via deductions from future wages—this must be a contractual right.
What happens if an employee disputes a deduction?
Employees must first raise the issue with their employer, and if cannot be resolved internally, they could make a claim to an employment tribunal for unlawful deduction of wages.
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