What deductions can and cannot be made from wages?

21/02/2023

Your employees will want to make sure they are being paid the correct amount. But, even if they are paid a constant salary, their wages could differ from month-to-month.

There are various scenarios in which an employee’s wages might be lower one month, but you need to be able to demonstrate the reason for this.

This will give your employee the peace of mind that they are being paid the correct amount and prove that you are fulfilling your duties as an employer.

What deductions must be made?

As covered in our previous blog, you must ensure that you deduct the necessary payroll taxes from your employee’s wages.

This includes calculating the correct amount of Income Tax, National Insurance contributions (NICs), and any student loan deductions due and submitting these to HMRC through your Full Payment Submission (FPS).

You can take other deductions from your employee’s pay under the following regulations:

• The deduction is agreed in writing or your contract
• It is a statutory payment to a public authority
• You are instructed to take debt payments from the court
• The employee was overpaid previously
• The employee didn’t work due to strike or industrial action

What voluntary deductions can be made?

You might choose to offer salary sacrifice benefits for your employees, such as childcare vouchers, pension schemes or providing a car.

Essentially, the employee’s cash pay will be reduced, in return for a non-cash benefit. But this must not reduce the employee’s earnings to below the National Minimum Wage.

Salary sacrifice schemes can reduce the level of tax that both you and your employee have to pay, for both Income Tax and NICs.

But you must work out the value of the benefit and report this to HMRC using a P11D or P11D(b) form. More information on what should be included in a P11D form will be covered later in this blog series.

The value is calculated through the higher figure from the amount of the salary given up or the earnings charge according to the benefit-in-kind rules.

Other voluntary contributions such as charitable donations, which are usually exempt from payroll taxes, can also be made.

How can you handle employee concerns?

If your employee has concerns about the deductions that have been made, make sure you can provide evidence for the deductions made and the reasons for these.

In the case that you have made incorrect deductions, these can be corrected in your Full Payment Submission (FPS).

If you underpaid your employee, you must pay them the correct amount and send an additional FPS which includes the difference between the pay you originally reported and the amount they should have been paid

More information can be found on this here.

Getting payroll right is essential for your employee’s peace of mind and to fulfil your obligations as an employer. Contact us for advice on making deductions and related matters.