Before your employees get that payday feeling, money must be deducted from their final wage. As an employer, you’ll be responsible for these stoppages on your team’s behalf.
Payroll deductions come in all shapes and sizes. The obvious ones are Income Tax and National Insurance, but we’re also talking about things like student loans and employee benefits. There are two main types of deductions: voluntary and mandatory.
Knowing deductions inside out (and managing them well!) will lead you to better overall payroll management and complete compliance. Read on for the lowdown on all things payroll deductions.
The legal stuff
When it comes to payroll deductions, there are various regulations you’ll need to comply with (of course there are!). Let’s start with the Employment Rights Act 1996.
There are a certain number of criteria that payroll deductions have to fulfil in order to legally make them from your team’s wages. These are:
- It’s legally-binding – like taxes, student loan repayments and court orders.
- It’s written into the employment contract.
- Both parties agreed to it beforehand (and it was put down in writing).
- It was an overpayment error.
- The employer has agreed to pay for something on the employee’s behalf (like a trade union membership).
- Missed work due to strike or taking industrial action.
As for Income Tax, you’ll need to deduct the right amount in line with your employees’ tax codes. Incorrectly calculating tax and withholding too much (or too little) can cause unnecessary stress to your people and your organisation as a whole, as well as using up precious time in rectifying needless errors.
If your team member has an Attachment of Earnings Order, you’ll be responsible for making the necessary deductions from their wages, by order of the court. But don’t worry, you’ll be instructed as necessary by the court telling you to deduct that money. It’s on you to calculate the deduction, start making those deductions from your employee’s next pay-packet and then make the appropriate payments to the court. When the debt has been settled, you’ll stop making the deductions.
It goes without saying you should comply with all legislation at all times and stay up to date with the changes. Deliberately providing false information or not complying with your legal obligations means risking penalties and legal complications. Worse, your employee may face fines too.
What are mandatory payroll deductions?
Mandatory payroll deductions are the ones you’re legally obliged to pay on behalf of your team. These include Income Tax, National Insurance Contributions, student loan repayments and court orders (as well as many others!).
Income tax
Once your employee earns between £12,571 and £50,270 they’ll be liable to have 20% deducted from their pay-packet by way of income tax. This climbs on earnings between £50,721 – £125,140 to 40%, and on earnings over £125,140, to 45%. Earnings brackets differ slightly in Scotland, but you can find a full breakdown of income tax rates and thresholds in the UK here.
National Insurance Contributions (NICs)
Majority of your people pay Class 1 National Insurance Contributions on their pay, and it all depends on how much they earn. If your employees’ pay comes below the NIC threshold, they won’t have a penny deducted from their wages. For majority of employees, the NIC threshold is £242 a week, or £1048 a month. Over and above that threshold, employees have to contribute based on what they earn up to the upper earnings limit, which is £967 per week or £4189 per month.
Here’s what’ll be deducted from your people’s pay, depending on whether they get paid weekly or monthly:
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
As for former students paying back their loans, once they earn above the certain thresholds, you’re liable to deduct 9% of their income. That 9% is deducted from their earnings above the threshold, depending on what student loan plan they have. Postgraduate loans (PGL) are slightly different because only 6% of the earnings above the threshold are deducted. Before any deductions are taken, your people must surpass certain thresholds. For 2024/25, the thresholds are as follows:
Plan | Threshold |
1 | £24,990/year |
2 | £27295/year |
4 | £31,395/year |
5 | |
PGL | £21000/year |
It’s worth mentioning that repayments for student loans are calculated on gross income, but as an employer you will deduct them from their 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.
Payroll deduction reporting requirements
It’s one thing to deduct correctly, but it’s another to report it correctly.
For student loans, the Student Loans Company issues the loans, but repayments are recouped through HMRC, via the PAYE system. As an employer, you have a legal obligation to let HMRC know on your team member’s “New Starter” form if they have a student loan to repay. Additionally, The Student Loans Company will make sure HMRC know if your employee has a student loan or PGL loan to repay and when they should start. His Majesty’s will be in touch with you with a “Start Notice”, which signals the beginning of making deductions. At any point if it’s necessary to stop deductions, you’ll be sent a “stop” notice.
HMRC is the head honcho when it comes to collecting deductions by way of Income Tax. As for reporting deductions to the HMRC, you must report employee deductions in a full payment submission (FPS). This should be done on or before your employees’ payday.
If you’re offering employee benefits, it’s on you to report taxable benefits, through your payroll or online after year end, with a deadline of July 6. You’ll need to head 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.
Reporting through payroll? It’ll all be done through RTIand you’ll be paying tax throughout the year. You won’t have to report benefits for individual team members at the end of the tax year if their benefits go through your payroll system. However, you still have to report the Class 1A National Insurance you owe after year end, by July 19. This can be done online by filling out and sending a P11D(b).
If you decide to take the route of reporting after year end, you’ll have to send to HMRC a P11D for each of your individual team members. As well, you’ll want to submit a report for any class 1A National Insurance you owe.
A good payroll software can issue P11Ds. Otherwise, HMRC’s PAYE Online Service offers P11D filing if your workforce doesn’t exceed 500 members.
What are voluntary payroll deductions?
The only difference between voluntary deductions and mandatory deductions is that an employee expressly agrees to have voluntary deductions made from their pay packet in exchange for things like health insurance premiums or employee loans, for example. Both voluntary and mandatory deductions come out of your payroll, except the voluntary deductions are a matter of employee choice.
To give you more of an idea of what a voluntary deduction looks like, here are some examples:
Health insurance premiums
It’s not always possible to include health insurance in your perks package. If this is the case, offering it as a voluntary deduction may well be a possible option.
Employees can sacrifice some of their salary each month to pay for this. The amount will depend on the type of plan they pick. Their monthly deduction for health insurance may cover routine GP appointments, prescriptions and diagnostic testing, right up to surgery.
Employee loans
An employee loan is another example of a voluntary deduction. As an employer, you’re able to offer up to £10,000 tax free to your people, without paying any tax or NI (National Insurance).
There are a few kinds of loans available. Your employee may take advantage of a season ticket loan to help them pay for their commute, or an advance on their salary. In most cases, a team member can get up to half of their (accrued) salary in advance. Any loan they take out with you will be deducted from their wage each month in order to pay it back.
Employee benefits
Certain employee benefits can be deducted from your team’s pay. These may include perks such as gym memberships, cycle to work schemes and life insurance. The salary sacrifice may subsidise the benefit or cover it completely.
Charity donations
If your team member is of a generous disposition, they may wish to give to charity each month via a wage deduction. This is also known as Payroll Giving and it allows your team to give to charity without having to pay tax on the contribution, but it has to be paid through PAYE.
Pension contributions
You’re legally mandated to enrol your team into a workplace pension, but they may also choose to make additional contributions to their pot of their own accord. This will mean another deduction from their salary.
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. When you use the online service, it removes the need of having to send in a P11D form. Payrolled benefits must be registered with HMRC ahead of the start of the tax year in which you wish to start payrolling benefits, Once that’s all done, your employees’ tax codes will be changed to reflect their benefits deductions.
You can put all benefits through your payroll, apart from accommodation (that you provide), as well as interest-free and low interest loans. You’ll have to report them though on a P11D.
After having registered your people for payrolled benefits, you’ll need to put in writing explaining what the deal is. You can do this via payslip, email or letter.
How payroll software can help
Payroll software has your back. You can use your payroll software to do a lot of things, like automatically calculating the necessary deductions, which removes the risk of making manual errors. Payroll software also keeps all your employee records together, in one central, easily accessible place. Finally, payroll software has everything you’ll ever need for reporting and compliance.
Managing deductions can be a bit of a pain, however help is at hand! Cintra’s payroll software automates all those fiddly calculations and deductions each month, so your teams can be freed up for more important tasks. Get in touch today for your very own demo.
Payroll Legislation Guide
The facts, figures, thresholds and allowances for 2024/25 spanning tax, National Insurance, pensions, statutory payments and more.
