Deducting employees' wages

What is a deduction from wages?

A deduction is any amount of money taken from an employee's total pay (ie their gross pay) before they receive it. Essentially, it's any part of their wages that you deduct or ‘take off' for a specific reason. This can include:

• statutory deductions - things you're required by law to deduct, like income tax and National Insurance contributions (NICs)

• contractual deductions - things you and the employee have agreed to, like pension contributions or repaying a season ticket loan

The final amount an employee receives after all deductions is their net pay (or 'take-home pay'). Every employee and worker is legally protected from unlawful deductions.

What payments can deductions be taken from?

Deductions can only be made from an employee's wages. For the purposes of deduction rules, wages include:

• normal pay (whether it's hourly, weekly, or monthly)

• holiday pay

• statutory payments, like Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP)

• bonuses and commission

There are other payments you might give an employee that don't count as wages for these rules. You generally cannot make deductions (other than through a separate agreement, like a loan repayment plan) from:

• expenses payments

• pension payments

• redundancy pay

• advances on wages or loans (eg for a season ticket)

What about tips?

There are special rules for tips, service charges, and gratuities. If you (as the employer) have control or significant influence over how these tips are shared out, you must not make any deductions from them.

The only exception is for statutory deductions, like income tax and NICs, which must be processed as normal.

When can an employer lawfully make deductions?

Under the Employment Rights Act 1996, it’s unlawful to make a deduction from a worker's wages unless it's done for one of the following reasons.

Deductions required by law

You must make certain deductions required by statute. The most common examples are:

• income tax and NICs (often made through the PAYE ('Pay As You Earn') system, and referred to as ‘PAYE deductions’)

• student loan repayments

• court orders (eg an attachment of earnings order for child maintenance)

Deductions in the employment contract

You can make deductions if a specific clause in the employee's Employment contract allows it. Before the deduction is made, the employee must have been given a copy of this contract (or a written explanation of the clause).

A contractual clause might, for example, allow you to deduct pay for:

• training costs, if the employee leaves shortly after you've paid for their course

• damage to business property caused by the employee's negligence

• salary sacrifice for pension contributions

Deductions with written consent

You can make a deduction if the employee has given their prior written consent. This consent must be specific to the amount and reason for the deduction, and it must be given before the event that leads to the deduction. For example, you can't ask an employee to sign a consent form for damaging equipment after they've already damaged it. Examples include:

• contributions to a charity

• trade union subscriptions

• payments for goods or services you provide to the employee (eg a staff uniform)

• repaying small miscellaneous debts (eg personal calls on a business phone)

Special exceptions

There are a few other situations where you can lawfully make deductions:

• to recover an overpayment - if you've accidentally overpaid an employee in a previous payslip, you're generally allowed to deduct the overpaid amount from their next wage. You don't need their agreement to do this, but it's good practice to discuss it with them and agree on a reasonable repayment schedule

• for taking part in industrial action - you can deduct pay when an employee takes part in a strike or other industrial action

• to pay a statutory body - for example, if an employee has to pay a public authority (like a local council) for a statutory penalty

Are there limits on deductions?

Yes. Even if a deduction is lawful, there are important rules that limit how much you can deduct.

The minimum wage rule

In most cases, a deduction cannot reduce an employee's final pay to below the National Minimum Wage (NMW) that they're entitled to for the hours they've worked.

This applies to deductions for things like training costs, stock shortfalls, or damage to property.

However, some deductions can legally take an employee's pay below the NMW. These include:

• statutory deductions like tax and NICs

• repaying an overpayment

• deductions for accommodation provided by you (up to a set limit)

• deductions for taking part in industrial action

Special rules for retail workers

There are extra protections for employees who work in retail (eg in a shop or bar). If you're deducting money because of cash shortages or stock shortfalls, you cannot deduct more than 10% from their gross pay from any single pay packet.

This 10% limit applies even if the employee has agreed in writing to a higher deduction. The only exception is in their final pay packet when they leave their job, where you can deduct the full amount owed.

What can an employee do about an unlawful deduction?

If an employee believes you've made an unlawful deduction from their wages, they have several options:

1. talk to you informally - the first step is normally for them to speak to their line manager or the HR department to resolve the issue. It may be a simple payroll error that you can correct in their next pay packet

2. raise a formal grievance - if they can't resolve it informally, they can raise a formal written complaint using a Grievance letter

3. contact Acas - if the internal process doesn't work, the employee can contact Acas to start early conciliation. This is a free service to help you and the employee reach an agreement without going to court

4. make a claim to an employment tribunal - the employee can make a claim to an employment tribunal. They must contact Acas for early conciliation before they can make a tribunal claim

What are the time limits for claims on underpayment?

There are strict time limits for making a tribunal claim:

• for a single deduction - the employee has three months (minus one day) from the date the deduction was made

• for a series of deductions - the employee has three months (minus one day) from the date of the last deduction in the series

An employee can claim for deductions going back up to two years, as long as the claim is brought on time (ie within three months of the last deduction) and either:

• there are fewer than three months between each deduction, or

• all deductions are linked (eg they were all caused by the same payroll error)

If you need to make deductions, it's vital that your employment contracts are clear and that you follow the correct procedures. If you're dealing with a dispute, it's often best to seek legal advice. You can use our Employment or Zero hours contract to set out clear terms for your staff. You should also adopt a clear Grievance procedure to enable employees to easily raise concerns and grievances with you.

Do not hesitate to Ask a lawyer if you have any questions about making deductions from wages.