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Deducting employees' wages

Occasionally, there are situations where an employer may need to make deductions from the wages of an employee (other than for Pay As You Earn (PAYE) purposes). It's important to know when such deductions are lawful and when they are not.

Employees and workers are protected from any unlawful deductions from their wages.

There are four general situations in which an employer is lawfully permitted to make deductions from the wages of employees:

  • if they are required or authorised to make deductions by law (eg PAYE)

  • if this is permitted under the terms of the employee contract (the written part of this contract, together with an explanation, must have been provided to the employee)

  • if the employee has consented to the deductions in writing (in advance of any deduction - and also in advance of any act or omission on the part of the employee which has led to the deduction)

  • if the employee missed work because they were on strike or taking industrial action

Any wage deductions should be set out in the employee's payslip.

Additionally, an exception under law applies in the case of an overpayment of wages - this allows employers to make a deduction in order to correct the error. For further information, read Overpayment of wages.

The terms of repayment of any money owed to an employer (eg in respect of loans) should be contained in any relevant written agreement; this may stipulate repayments through deductions of wages.

Small miscellaneous debts owed (eg personal calls made on a company mobile phone) can generally only be deducted if these were specifically agreed in writing.

Deductions from wages must not reduce an employee's pay to below the national minimum wage rate (although there are some exceptions in respect of accommodation). This rule applies even if an employee has given explicit written permission.

In respect of workers in the retail sector, it is illegal for employers to deduct more than 10% from gross pay (ie before tax and national insurance contributions) if the deduction is made due to cash shortages or stock deficiencies; except in the case of final payment on termination of employment - in which case they can deduct the full amount.

Employers must inform workers in writing if they owe money. Employers must explain how and why they will claim the money back before the worker’s next payday.

Under the law, claims for backdated deductions from wages for holiday pay are subject to a two-year time limit.

The first step is to raise it with a line manager or HR manager and try and resolve the matter informally. If that does not work, a grievance can be raised through the normal channels and/or by talking to a union representative. Failing that, Ask a lawyer to find out about going to an Employment Tribunal.