First published on Wednesday, July 31, 2024
Last updated on Wednesday, July 31, 2024
One of the key responsibilities of any UK employer is managing payroll efficiently and this task includes deducting certain amounts from employee pay.
But what are the different types of deductions to consider and are you legally obliged to action them all? There are multiple payroll deductions to navigate, and they differ from employee to employee.
The laws surrounding payroll deductions change all of the time and it’s crucial to keep up to date with the ever-changing laws. It’s not just important for employees to be accurately paid but there are legal obligations as an employer to factor in, which makes it important to get right.
Read on to discover everything you need to know about payroll deductions.
Understanding the legality of payroll deductions in the UK
In the UK, there are a number of laws and regulations that are put in place to protect employees and ensure they are fairly compensated for their work. As an employer, it’s your responsibility to follow these rules and regulations and understanding payroll deductions and the regulations surrounding them is the first step.
Failing to do so can leave you vulnerable to potential legal issues not to mention potential conflict in the workplace.
The legal framework surrounding pay deductions involves the following:
The Income Tax Act 2003
This guides employers on how to deduct income tax from an employee’s pay under the PAYE system. Deducting the correct amount and sending the rest to HMRC falls under your responsibility and failure to do this will result in a hefty fine.
Social Security Contributions and Benefits Act 1992
This guides employers on how to deduct National Insurance contributions.
Pensions Act 2008
This act governs employers on specific pension guidelines such as the automatic enrollment for workplace pensions.
Employment Rights Act 1996
This act outlines employee rights and governs how employees are informed about pay deductions.
Data Protection Act 2018
There are various data protection laws that employers must abide by regarding personal data used for calculating these deductions.
Compliance is crucial here because employers who fail to adhere to the rules set out in the legal framework can put you at risk of severe fines and legal action from HMRC.
This can not only affect you financially as a business, but it can also cause damage to your reputation as a company. Consequences can be extremely costly with employers facing back payments, fines and interest on unpaid amounts.
Types of payroll deductions
So, what are the different types of deductions that you need to be aware of? It’s essential that you understand the difference between the types of payroll deductions to stay compliant.
Pay deductions can be categorised into two main types statutory decuctions and non-statutory deductions. Lets look into them in more detail.
What is a statutory deduction?
This type of deduction is one that you are legally required to make. Statutory deductions include:
Income Tax
Income tax must be deducted from an employee's pay. This is a legal requirement governed by the PAYE system and the amount deducted will depend on the individual employee’s income level and tax code. The HRMC creates the tax bands, but it’s your responsibility as the employer to deduct this from your employees' pay .
National Insurance
These deductions fund employee benefits such as a state pension and the NHS. To calculate this deduction, you should start with the employee’s gross earnings, (basic salary, overtime and any bonuses) and then apply the appropriate thresholds and NI rates that apply to the National Insurance category that the employee falls into.
Most employees, for example, will fall into a Class 1 category but it’s important to confirm the NI class as the category impacts the rate applied. You also have a legal duty to pay national insurance contributions to all employees.
Pension Contributions
All eligible employees should be automatically enrolled into a company pension and you are obliged to contribute to this. You must also allow your employee's to opt out of this if they want to.
Court Orders
Sometimes a pay deduction may be required by law to repay debts. This amount will be dictated by a court.
Student Loan Repayments
If you have employees who have taken out a student loan, you are responsible for deducting their student loan repayments from their pay. This only applies if they earn enough to reach a certain threshold to make the repayments.
These are all of the deductions that you have to adhere to legally. But what about the optional ones?
What are non-statutory deductions?
These deductions are not legally required but could be offered by an employer as part of a workplace benefit scheme. Non-statutory deductions include:
Voluntary Pension Contributions
An employee may decide to contribute additional amounts that are larger than the standard pension plan and this amount will be deducted from their pay.
Childcare Vouchers
This is a scheme where employees can use their pre-tax income to pay for childcare and this amount will be deducted from their pay.
Union Dues
If an employee is a member of a trade union, they may have dues deducted from their pay.
Charitable Donations: Often employees decide to donate to a charity of their choice via payroll and employers authorise these deductions.
Health Insurance Premiums
If you offer a health insurance plan for employees, the premium for this will be deducted from their pay.
Loan and Advance Pay Repayments
Monthly repayments for a loan of an advanced payment of wages can be deducted with employee consent.
Understanding the distinction between statutory and non-statutory deductions can help to ensure you are always on the right side of the law.
It’s essential as a UK employer that you ensure compliance with statutory deductions to avoid legal repercussions. It’s also your responsibility to make sure that employees are both aware of and understand their pay deductions.
The importance of communication and employee consent
Another critical factor when navigating payroll deductions is transparency. It’s important for you as an employer to understand the ins and outs of payroll deductions, but it’s also crucial that your employees understand them too.
First, let’s look at the legal obligations that come with misinformed employees. It’s your responsibility to get employee consent regarding any of the non-statutory deductions listed above. If you deduct money from your employees' pay without consent this can lead to legal disputes or claims for unlawful deductions.
When employees are informed and in control of their deductions, it can contribute to an empowered workforce. An employee can choose to opt into a pension scheme or opt-in for charitable donations, it empowers them and results in increased job satisfaction.
Being open and honest about deductions, fosters a sense of trust in the workplace and contributes to a more positive working environment.
So, what can you do to facilitate this?
Well, you can:
Offer clear communication about payroll deductions, this will minimise the risk of misunderstandings and potential conflicts in the workplace regarding employee pay.
Create a clear policy regarding payroll and deductions and remember to communicate it effectively to employees. This policy should also be easily accessible to employees.
Encourage feedback so employees can voice their concerns or seek clarification. Communication regarding deductions should be a two-way street.
Follow these simple steps to create an empowered workforce and ensure that when it comes to statutory and non-statutory deductions, everyone is on the same page.
Get help paying with your payroll deductions from BrightHR
Payroll deductions are an integral part of the payroll process and with new regulations being put in place all the time, staying informed has never been more important. Small steps such as prioritising open dialogue and clarity regarding deductions can go a long way in enhancing employee satisfaction and reducing misunderstandings.
Implementing a digital payroll system has benefits for employers and employees including:
Automated calculations reducing the risk of human error and helping you comply with current tax rates and regulations
It can streamline your payroll process and reduce the time spent on inputting the information manually
Auto-adjust payroll info to comply with any changes in legislation providing you with enhanced compliance
Data protection through encryption and secure access protocols to keep employee data safe
Navigating payroll deductions can be challenging but with the help of BrightHR, you can take the stress out of the process. Using a digital payroll system is a simple way to ensure you are always compliant and up to date with the latest laws and regulations surrounding payroll deductions.
With BrightHR, you can manage employee pay deductions efficiently and communicate all of the important information to employees quickly and easily.
If you want to take the hassle out of deductions, let BrightHR help! Check out our innovative online payroll software. Here you can relax in the knowledge that everything regarding payroll deductions is stored securely in one place.
