wage-deductions-explained

Wage Deductions Explained

 26 Nov 2018

For many employees, the most important aspect of their month/week will be their deposit of pay. An employment contract is an agreement between an employee and employer which will stipulate various conditions including pay, responsibilities and hours of employment during a specific period. However, employee pay involves processing various deductions that are either law implemented or as a result of being outlined within the employment contract.

As an employer, you're only allowed to make deductions if:

  • Payment is required or permitted by law such as National Insurance contributions, income taxation or student loan repayments.

  • The deduction has been agreed between the employer and employee in writing.

  • The employee's contract states that the employer has the ability to make responsible deductions.

  • There is a statutory payment due to a public authority.

  • The employee has not worked as a consequence of volunteering to participate in a strike or industrial action

  • An overpayment was made during a previous pay period.

  • A court order requests financial deductions.


If a deduction is required from an employee’s pay, then the deduction cannot reduce the employee’s pay below the national minimum wage even if both parties have reached an agreement unless the deductions are for:

  • Income taxation or National Insurance

  • The result of an action by the employee and their employment contract states they are liable for the costs

  • The repayment of a loan or advancement of wages

  • The repayment of an accidental overpayment in a previous pay period

  • Purchasing shares from the business

  • A repayment for accommodation supplied by the employer

  • Employee opt-in schemes (Union subscriptions or pension contributions)


There is legal protection from unauthorised pay deductions that are applied to employees and workers who are:

  • Apprentices

  • Employees working to a contract for services

  • Crown servants

  • Anyone who works onboard a ship which is registered in the United Kingdom


If a deduction is required then an agreement must be signed and witnessed by the employer and employee and completed prior to any deductions being processed. The agreement must also be pre-standing prior to any shortcomings which result in the employer wanting to make payment deductions. If the employee is requested to sign a deductions agreement following the event, then no financial deductions can be made unless the event occurred again. However, if employee’s contract stipulates that the employer has the ability to make wage deductions, the employee must have supplied either:

  • A written copy of the part of the contract which highlights the wage deductions eligibility

  • A written explanation of the procedure prior to the employer making any deductions


Nevertheless, there is additional protection from deductions for retail employees as a consequence of their work. This additional protection prohibits any deduction which has been agreed for inventory shortages and financial losses to exceed 10% of the employee's gross wage. If the agree deduction is greater than 10% then the deduction must be spread across future pay periods to minimise the risk of an employee experiencing severe financial issues. The only time that the employers have additional legality for additional deduction is when the employee has finished their employment with the company and has an outstanding obligation. This means the full balance can be taken from the last paycheck.

If an employee feels they have experienced illegal deductions from their wages they should follow the following protocol.

  • Check recent payslips and compare the deductions to the employment contract to see if the deductions are lawful and within the parameters stipulated in the contract.

  • Raise the concern directly with the employer to seek a reasonable justification for the deductions to provide the employer with an opportunity to resolve the problem without the employee resorting to legal measures.

  • Speak to their local union or employees association to see if they can support their claim and work out a solution on behalf of the employee

  • If the issue has not been successfully resolved, then the employee can go to an employment tribunal to recover the money plus any supplementary charges which may have been incurred from non-receipt of their wages.


If an employer is concerned about the legitimacy of their deduction protocols or unaware of the full extent of their responsibility. The employer could experience fines and legal suits to resolve any mispractice. However, there are payroll bureau’s which can support a business of any size to perform their payroll and corresponding deductions within the law. These companies often provide their services for a cost per an employee to justify their services and highlight the small contribution to outsource the issue at a fraction of the employee’s cost.