We all love getting paid at the end of the month, right? And due to payroll deductions, we don’t take home every penny we earn.
These deductions serve various purposes, such as contributions to taxes, social security, pension schemes, and other benefits. The details of these deductions are usually specified in the employment contract or determined by statutory regulations.
Fortunately for you, we’ve compiled a list of all the mandatory and voluntary deductions you need to know about in the UK.
The legal obligations
With payroll deductions, as expected, there are several regulations that you must comply with. Let’s start with the Employment Rights Act 1996.
Certain criteria must be met for payroll deductions to be legally made from your team’s wages. These include:
- Legally binding aspects, such as taxes, student loan repayments, and court orders.
- Inclusion in the employment contract.
- Mutual agreement between both parties, documented in writing.
- Instances of overpayment error.
- Employer agreement to cover expenses on the employee’s behalf (like trade union membership).
- Deductions related to missed work due to strikes or industrial action.
Regarding Income Tax, it’s crucial to deduct the appropriate amount in accordance with your employees’ tax codes. Incorrect calculations, whether withholding too much or too little, can lead to unnecessary stress for your employees and your organisation as a whole. Rectifying these errors also consumes valuable time that could be better utilised elsewhere.
If one of your team members has an attachment of earnings order, it becomes your responsibility to make the required deductions from their wages as directed by the court. You will receive instructions from the court specifying the amount to be deducted. Your role includes calculating the deduction, initiating the deductions from the employee’s next pay packet, and subsequently making the necessary payments to the court. Once the debt is settled, you can cease making the deductions.
How important is it to stay compliant?
Compliance with all legislation is essential at all times, and staying current with any changes is imperative.
Intentionally providing false information or neglecting legal obligations carries the risk of penalties and legal complications. Furthermore, such actions may lead to fines for the employee as well.
What are voluntary payroll deductions?
Voluntary deductions are mutually agreed between the employer and employee, to be used for things like insurance, savings, and investments.
To provide a clearer understanding of voluntary deductions, here are some examples:
Pension contributions
While you are legally required to enrol your team in a workplace pension thanks to automatic enrolment regulations, they also have the option to make additional contributions voluntarily to enhance their pension fund. This will result in an additional deduction from their salary.
Charity donations
Should your employer have a charitable inclination, they might choose to contribute to charity monthly through a wage deduction, commonly referred to as Payroll Giving. This allows your team to make tax-free contributions to charity, facilitated through PAYE.
Health insurance premiums
Incorporating health insurance into your perks package isn’t always feasible. In such situations, providing it as a voluntary deduction is a potential alternative.
Employees can choose to allocate a portion of their monthly salary for this, with the amount varying based on the selected plan. The monthly deduction for health insurance may encompass routine GP appointments, prescriptions, diagnostic testing, and even surgical procedures.
Employee benefits
Some employee benefits can be subtracted from your team’s pay, encompassing perks like gym memberships, cycle-to-work schemes, and life insurance. The salary sacrifice may subsidise the benefit or cover it completely.
Employee loans
An employee loan stands as another instance of a voluntary deduction. As an employer, you have the opportunity to provide up to £10,000 tax-free to your employees, exempt from tax or National Insurance (NI).
Various loan options exist, including a season ticket loan to assist with commuting expenses or an advance on salary.
Typically, team members can receive up to half of their accrued salary in advance. Any loan obtained will be deducted from their monthly wage to facilitate repayment.
What are mandatory payroll deductions?
Mandatory payroll deductions are payments you are legally obligated to make on behalf of your team. These include Income Tax, National Insurance Contributions (NIC), student loan repayments, court orders, and various other obligations.
To provide a clearer understanding of mandatory deductions, here are the ones you need to be familiar with:
Income tax
When your employee’s income falls between £12,571 and £50,270, a 20% deduction for income tax will apply.
This rate increases to 40% for earnings between £50,721 and £125,140, and for earnings surpassing £125,140, the deduction rises to 45%.
In Scotland, income tax brackets vary slightly.
National Insurance Contributions
The majority of your employees pay Class 1 National Insurance Contributions, and the amount varies depending on their earnings.
If your employees’ pay falls below the NIC threshold, no deductions will be made from their wages. For most employees, the NIC threshold is £242 per week or £1048 per month. Beyond this threshold, employees contribute based on their earnings up to the upper earnings limit, set at £967 per week or £4189 per month.
Here’s what will be deducted from your employees’ pay, based on whether they receive weekly or monthly payments:
Weekly rates for Class 1 NICs
| On first £242 | Nil |
| On income between £242 and £967 | 8% |
| On amount above £967 | 2% |
Monthly rates for Class 1 NICs
| On first £1048 | Nil |
| On income between £1048 and £4189 | 8% |
| On amount above £4189 | 2% |
Student loan repayments
Former students repaying their loans are subject to a 9% income deduction once their earnings exceed specific thresholds.
This 9% is applied to their income above the threshold, depending on their student loan plan. Postgraduate loans (PGL) differ slightly, with only 6% of earnings above the threshold being deducted.
It’s important to note that deductions commence once your people surpass certain income thresholds.
| Plan | Threshold |
| 1 | £24,990/year |
| 2 | £27295/year |
| 4 | £31,295/year |
| 5* | |
| PGL | £21000/year |
It’s also important to note that student loan repayments are calculated based on gross income, but as an employer, you will deduct them from your employees’ net income.
*Plan 5 is a new repayment plan being introduced for students starting undergraduate and advanced learner loan courses on or after 1 August 2023. Very aptly called plan 5, people won’t be expected to make their repayments until April 2026 at the earliest, even if someone leaves a course early.
What are your payroll deduction reporting requirements?
Accurate deduction is crucial, but equally important is the correct reporting.
For student loans, the Student Loans Company provides the loans, but repayments are collected through HMRC via the PAYE system.
As an employer, you are legally obligated to inform HMRC on your team member’s “New Starter” form if they have a student loan to repay. Furthermore, The Student Loans Company ensures that HMRC is aware if your employee has a student loan or PGL loan to repay and determines the commencement date. HMRC will reach out to you with a “Start Notice” to signify the initiation of deductions. If it becomes necessary to halt deductions at any point, you will receive a “Stop” notice.
HMRC is the head honcho when it comes to collecting deductions by way of Income Tax.
When reporting these deductions to HMRC, it’s essential to submit employee deductions through a full payment submission (FPS) on or before your employees’ payday.
If you’re offering employee benefits, then it’s your responsibility to report taxable benefits either through your payroll or online after the year-end, with a deadline of July 6. Click here to determine the type of benefit you’re offering, and also to get the lowdown on what you’ll have to report and what you’ll have to pay.
When reporting through payroll using Real Time Information (RTI), tax payments are distributed throughout the year, eliminating the need to report individual team members’ benefits at the tax year-end if managed within your payroll system. However, reporting Class 1A National Insurance owed is still required after the year-end, due by July 19, and can be completed online by submitting a P11D(b).
Opting for post-year-end reporting means sending a P11D to HMRC for each team member and submitting a report for any owed Class 1A National Insurance.
Efficient payroll software can generate P11Ds, and for smaller workforces (under 500 members), HMRC’s PAYE Online Service facilitates P11D filing.
How to deal with benefit deductions in your payroll
If you want to put employee benefits through your payroll, you’ll have to register with HMRC. Utilising the online service eliminates the need to submit a P11D form. Payrolled benefits must be registered with HMRC before the start of the tax year in which you intend to implement payrolling benefits. Once completed, your employees’ tax codes will be adjusted to reflect the deductions for benefits.
Almost all benefits can be processed through your payroll, with the exception of provided accommodation, interest-free, and low-interest loans. These exceptions must be reported on a P11D.
After registering your employees for payrolled benefits, you need to communicate the details in writing, which can be done through a payslip, email, or letter.
With JPS, you’re in good hands
Our payroll software offers a wide range of functionalities to help you and your team manage payroll deductions:
- Automatically calculate any necessary deductions, eliminating the risk of manual errors.
- Centralise storage of all your employee records in an easily accessible place.
- Ensure full compliance, as our payroll software is consistently updated to align with the latest legislative developments, alleviating the need for manual updates.
Managing deductions, often a complex task, becomes hassle-free with JPS. Reach out today to schedule your personalised demo and experience the benefits firsthand.