Pay and deductions

Pay

Pay for Pay As You Earn (PAYE) purposes includes things like basic wages (or salary), allowances, overtime payments and bonuses. It’s important when thinking about pay to remember that you must pay your employee at least the National Minimum Wage (NMW). See our dedicated page for more information about the NMW.

Other payments which you may need to make, and which are also treated as normal pay, are:

Holiday pay: most workers are legally entitled to a minimum of 5.6 weeks paid holiday per year (known as statutory leave entitlement or annual leave).
Statutory Sick Pay: You may decide to pay your employee their normal pay during any periods of sickness absences, but if you do not, you may need to pay them at least the basic legal minimum level.
Statutory parental pay: Employers are also required to pay things like Statutory Maternity Pay, Statutory Paternity Pay and Statutory Adoption Pay where the relevant conditions are satisfied (although you will be able to claim reimbursement from the government for most of it).

For more information about these elements, click on the links to the dedicated pages above. Please note that these matters can be complex and our information should be taken as an introductory guide only and not a comprehensive statement of the law.

As well as regular pay, you may provide other benefits or expenses to your employee, such as a mobile phone, or travel expenses. Sometimes these can be treated as additional income on them, however as we explain on our benefits and expenses page, these are usually reported to HMRC differently to regular pay. Class 1A National Insurance (NIC) may be payable by the employer on these amounts, at a rate of 13.8% for 2023/24.

For guidance on the treatment of the various pay elements that may be due when an employee leaves, for example, statutory redundancy pay or accrued holiday pay, please see our employee leaving section.

Deductions

In general, if you want to make deductions from your employee’s pay, one of three conditions has to be met:

1. It is required or authorised by legislation (for example, income tax or NIC)
2. It is authorised by the workers’ contract – provided the worker has been given a written copy of the relevant terms or a written explanation of them before it is made
3. The worker consented to it in writing before it is made.

There are exemptions from these conditions, which allow an employer to recover an overpayment of wages.

The law protects individuals from having 'unauthorised deductions' made from their wages, which includes complete non-payment of wages.

You can find out more about unauthorised deductions on the ACAS website.

In terms of deductions that are commonly made from pay, we look at several below – please note that some are taken from your employee’s pay before tax (their gross pay), while others are taken from pay after tax (their net pay).

Pensions

Your employee may be paying towards a workplace pension that you have set up or arranged access to under the auto-enrolment programme.

There are two ways that an employee can contribute to a pension:

• Under arrangements where the pension amount is deducted before tax is calculated (meaning the employee receives tax relief there and then) – known as net pay arrangements.
• Under arrangements where the pension contribution is deducted after tax is calculated and HMRC later send the tax relief to the pension scheme – known as relief at source arrangements.

There is no NIC relief for employee pension contributions.

For more information about your auto enrolment obligations, go to our auto-enrolment page.

Court orders and child maintenance

A court can order that deductions be made directly from your employee’s net (after tax and NIC) pay, for example because they have incurred a debt or fine or are in arrears with a council tax bill. These are known as Attachment of Earnings Orders (AEOs) or sometimes Earnings Arrestment. The deduction may be a specific amount or may be calculated based on a percentage of your employee's net pay.

You can find some information on AEOs on GOV.UK.

The Child Maintenance Service or Child Support Agency (CSA) can ask for a Deduction from Earnings Order (DEOs) for the maintenance of a child. They may also ask you to provide information about your employee, which you must give if you are asked for it. Attachment of Earnings Orders, as described above, are another way of collecting child maintenance from a parent’s earnings. You can find out more about child maintenance DEOs and AEOs and what you will need to do on GOV.UK.

⚠️ Please note that with these type of orders, you are entitled to take off an extra £1 towards your administrative costs (if you want to). However you should be aware that this will reduce the worker’s pay for minimum wage purposes. You should therefore not take the deduction if it will reduce the worker’s pay under the minimum wage.

The Department for Work and Pensions (DWP) also has the ability to recover overpaid benefits by deduction from an individual’s earnings. These are called Direct Earnings Attachments (DEA). The DWP will write to you if you need to make DEA deductions and tell you what you need to do.

More information on DEAs, is available on GOV.UK.

Example

Nancy is the employer of James. Nancy gets a letter from the DWP asking her to collect £41.10 from James with immediate effect under the ‘standard deduction rate’ DEA rules. In the next pay period after she gets the letter, James’ net pay is £320. Nancy sees the rate of deduction for net pay of £320 is 11%, so she calculates that she needs to deduct £35.20 (11% of £320) from James and pay it to DWP. This means James only receives £284.80. In the pay period after, when James’ pay is £290, she deducts the remaining £5.90. She pays the total amount of £41.10 to DWP using the bank details they provided in the letter.

Please note that you may also be asked to make deductions for Housing Benefit overpayments an employee owes – such a request will come from your employee’s local authority, not DWP.

You may be concerned that by making these type of deductions, you will place your employee in hardship. However, if you receive an order, you must comply with it – under some orders, you may be fined or prosecuted if you do not. You can perhaps suggest that your employee talks to an experienced adviser at a Citizens Advice or other welfare organisation if they need help with money and debt.

Student loans and postgraduate loans

Students in higher and further education (including part time study) in the UK can get government-funded loans to help with their course fees and expenses while they are studying. The Student Loans Company (SLC) makes the loans and HMRC collects repayments of the loans via the PAYE system.

Loan rules can vary depending on the part of the UK where and when the loan was granted. There are four main types of student loan repayments, plan 1, plan 2 and plan 4 loans and postgraduate loans (PGL).

Students start repaying their students loans once they have left their course and their gross income (so income before any deductions such as tax or NIC, for example) is more than a certain amount – the threshold. If their income is high enough, their repayments start in the April after they leave their course.

From 6 April 2023, the income threshold for starting to make plan 1 repayments is £22,015 a year (£1,834.58 a month or £423.36 a week).

The threshold for a plan 2 loan is £27,295 a year (£2,274.58 a month or £524.90 per week).

The threshold for a plan 4 loan is £27,660 a year (£2,305 a month or £531.92 per week).

The threshold for a PGL loan is £21,000 a year (£1,750 a month, £403.84 a week).

For Plan 1, 2 and 4, once an employee's income goes above the relevant threshold, you deduct 9% of their income that is above the threshold and pay it to HMRC (who pass it to the SLC).

Repayments for PGL will be calculated at 6% of their income above the threshold. This goes towards repaying their loan. Although repayments are calculated using gross income (that is, income before deductions), you deduct them from their net income.

Student loan repayments are not calculated cumulatively, but on a pay-period basis in a similar way to National Insurance contributions.

This means that if your employee has fluctuating earnings, there is no automatic adjustment for over/underpayments in subsequent months or at the tax year-end under the PAYE mechanism. However, if the employee is not in Self Assessment and has earned under the student loan repayment threshold over the tax year, they can apply to the SLC for a repayment of the student loan deductions overpaid.

Please note that a borrower may be liable to repay a normal student loan AND a PLG concurrently, as they are separate loan products. This means that where applicable, employers will have to deduct both normal student loan repayments and PGL repayments.

If an employee has a student loan and/or PGL to repay via the tax system, SLC will advise HMRC when a borrower is due to start repaying them. HMRC will in turn contact you by sending you a ‘start notice’ (either by post or by an internet notification if you are registered to use HMRC's PAYE Online for Employers service or you use software). If you are to stop deductions, HMRC will send a ‘stop notice’.

Each loan type will be started and stopped in its own right, so if an employee has paid off both their student loan and PGL, the employer would receive two stop notices.

If you take on a new employee who is due to make student loan/PGL repayments, check the P45 for a tick in the student loan box - you may need to check with them whether it is a plan 1,2,4 loan or a PGL. You can ask your employee to fill in the Starter Checklist to collect this information as it has a section on student loans on it. If they do not know the plan type, ask them to confirm with the SLC. If they don’t have a P45 make sure they tell you about their student loan position as part of the ‘starter’ information they should give you. If their earnings are above the thresholds, you should start making deductions without waiting for a ‘start notice’ from HMRC.

If you receive a start notice from HMRC but the employee’s earnings are below the relevant thresholds, you should update the employee’s payroll record to show that they have an SL and/or PGL loan and then file the start notice.

Please note that if you are an online filer, HMRC will send a generic notification if you don’t report any student loan deductions for a specific employee when a deduction is expected in your payroll submission. The generic notification is a prompt for you to check and make the correct deductions for future pay periods.

The prompt will be delivered to your inbox along with any other GNS messages. You should check your inbox regularly to ensure you can act on any prompts or sign up for email alerts.

You can find the detailed employers student loan guidance on GOV.UK. If you have any questions, you should contact the Employer Helpline.

If your employee has any questions about student loan or PGL repayments, HMRC have produced this basic guide, which may help them or you can direct them to our students section.

Other

Payroll Giving

Your employees can donate to charity directly from their pay using Payroll Giving. Donations are taken from pay BEFORE tax is calculated, meaning the employee receives tax relief (but not NIC relief) immediately. You can find information on setting up a scheme on GOV.UK.

Payroll saving

In a time of hard to come by affordable credit and pay day loan sharks, some employers are helping employees to save by setting up a payroll deduction into a credit union savings account. The theory is that this presents a convenient and safe route into saving for employees (credit unions are not-for-profit financial cooperatives regulated by the UK Financial Conduct Authority and savings are covered by the Financial Services Compensation Scheme). In addition, once the savings account is opened and the link between the employee and credit union established, the credit union may then be another avenue to explore in terms of a loan for the employee, if one is required.

The process of taking savings from an employee’s net pay is straightforward and little other input is required from the employer once things are set up, however there is absolutely no obligation on you to help your employee in this way if you do not wish to.

If this is something that you are interested in looking into however, then the credit unions have lots of help and information for employers on setting up an account and making the payroll deduction. The first step is to contact a credit union.

You can get information about credit unions from a trade association like the Association of British Credit Unions (ABCUL).

Overpayment of wages

The Employment Rights Act 1996 allows employers to make deductions from an employee’s future wages to recover overpayments of wages made by mistake, however it is sometimes possible for an employee to object to such a deduction.

You should seek appropriate employment law advice, for example from ACAS, before making any deductions.

In situations where an employer can legitimately make a deduction from an employee’s wages to claw back some of the wages they have overpaid them, it is good practice for the repayment arrangements to be agreed with the employee and for the employer to be flexible and reasonable so the employee is able to afford the repayments – perhaps over a period of time.

HMRC does not play a role in that aspect of the relationship between the employer and the employee. However, there may be consequences for tax and National Insurance (NIC) that flow from the recovery of overpaid wages, and these would follow the normal rules in place for employers.

For example, where an employer overpays an employee who remains in employment, an employer might just deduct the gross overpayment from their gross wages (note that such deductions from pay do not affect a worker’s minimum wage pay).

This should leave the employee’s ‘net’ tax position, more or less the same as if the overpayment hadn’t happened, as we can see in this example:

Adam, who lives in England, is usually paid £350 a week, however one week in April 2023 his employer paid him £400 by mistake. After tax and NIC, Adam was better off by £33.37.

Gross	£350	£400
Tax	(£21.60)	(£31.60)
NIC	(£21.20)	(£27.83)
Net	£307.20	£340.57

In order to claw back the overpayment, in the next pay period, Adam’s employer reduces Adam’s gross pay of £350 by £50:

Gross	£300
Tax	(£11.60)
NIC	(£14.57)
Net	£273.83

Reducing Adam’s gross pay by £50 results in Adam receiving £33.37 less by way of net pay, which therefore gives the correct result.

However, sometimes there will be a mismatch using this mechanism – for example, if the reduction in gross pay causes an employee to move below the relevant threshold for the deductions.

An employee shouldn’t be asked to pay back more than they actually received. As an alternative therefore, or where an employee has left (and the employer decides not to simply write the overpaid amount off), an employer should work out the amount of the overpayment that the employee actually received (that is, the net amount, after deduction of tax and NIC) and recover that (either by making a deduction from net pay or by asking the employee to pay it back by cheque for example).

Once that has been received, the employer should go back and rewrite the incorrect payroll entries to recover the overpaid tax and NIC from HMRC. This should restore the status quo.

Loans/advances of wages to employees.

Sometimes employers might loan or advance a sum of money to their employee.

For payroll purposes, if an employer and employee make an agreement under which the employer lends the employee money and the employee agrees to repay it at a future date or dates, then the amount is not reportable on the Real Time Information (RTI) submission. (If the amount is large, you may be providing the benefit in kind of an interest-free or cheap loan.)

Where there is an advance of wages which is essentially a payment on account of earnings, when the employer agrees to pay the employee money the employee has earned but which is not yet due for payment, this is strictly reportable under the RTI system at the time the payment is made, although there is an easement for ‘ad hoc’ payments outside the normal payroll run, which may sometimes apply.

Further HMRC guidance on this issue can be found here.

Given the substantial administrative work for not just employers, but also for HMRC that the additional RTI reports could have (and also have unintended impacts on universal credit), HMRC have recently addressed how salary advance payments are to be treated going forward. You can find a press release with some comments from us on the implications of this here.

Note, there are a host of ‘salary advance’ companies set up to work with employers to let employees access part of their salary as they earn it (for a fee), rather than having to wait until their payday.

You can find some more information and an example of how they work on the Money Saving Expert website.  

A recent statement by the Financial Conduct Authority (FCA) said these schemes can be a low-cost alternative to other ways of borrowing. However, it said they need to be used responsibly and with tools that encourage good saving habits. The statement sets out some things to consider about these schemes from both an employee and employer perspective and highlights some risks associated with them too.