Key Points to Note When Making Deductions to Your Employees’ Wages in the UK

As an employer, you must be aware of the laws relating to employee wages. Per their employment contracts, they perform a role in your business in return for a payment from you. Therefore, ensuring your employees’ pay is correct is essential. However, there will be times when errors can occur, and you may need to make deductions from your employee’s wages. You must ensure you only deduct from employees’ salaries where you can legally do so, or you can face an unlawful deduction of wages claim at an employment tribunal. When deducting from your employee’s wages, you should also be mindful that this could result in low staff morale and poor productivity. This article will explain some key points you should be aware of when making deductions from your employee’s wage and when you can lawfully do so.

When Can You Make Deductions From Wages?

There are only specific reasons and conditions which allow you as an employer to make deductions from your employee’s wages. These include:

• the employment contract states that you can make a specific deduction, such as through a deduction clause for property damage;
• you and your employee previously agreed in writing that you could make the deduction;
• you have overpaid your employee in error;
• the law requires you to make the deduction such as due to income tax or due to a court order; and 
• your employee took part in industrial action so was absent from work.

If your business is in the retail industry, you can deduct your employees’ wages where there are mistakes or shortfalls in work. However, this is limited to 10% of their gross pay unless it is taken from their final income when they leave employment with you. 

Deductions for Overpayment of Wages

Your business may deduct employee wages for the overpayment. Before making these deductions, you should let your employee know of your mistake as soon as you are aware of it. Overpayments are usually deducted from the employee’s subsequent pay. However, you may both agree to a bank transfer instead. Where the overpayment took place a long time ago, you should offer an alternative form of repayment, including a payment loan.  

National Minimum Wage

However, there are some instances where this is permitted, and these are where the deduction is for:

• tax or national insurance;
• an action carried out by your employee which their employment contract states they are liable for, such as causing damage to a vehicle due to their reckless driving;
• repaying a loan or wages, you have paid in advance;
• a previous overpayment you made in error;
• shares or similar assets in your business;
• the accommodation you provide them; or
• a subscription or contribution, or anything else used by your employee.

Deductions Through a Court Order

As an employer, one of the circumstances in which you are allowed to make a deduction to your employees’ wages is where you have to by law. One instance of this is due to a court order. A court order might concern:

• maintenance payments; or
• a county court judgement.

The law requires you to deduct court order payments from your employees’ wages. Failure to do so may result in a fine for your business. You can also receive a fine if you give incorrect information about how much your employee earns.

When legally required to make deductions to your employee’s wages due to a court order, you will:

• receive a court document informing you of the requirement to make a deduction;
• calculate the amount of the deductions per pay;
• deduct the amount from your employees’ pay from their next salary and pay them the rest of their wages as usual; and
• make the deduction as a payment directly to the court concerned.

The process differs if your employee has to pay benefit debt or child maintenance through a wage deduction.

Key Takeaways

As an employer, you may find that there are times when you need to deduct from your employee’s wages. Therefore, you must understand the laws surrounding wage deductions. For example, you can only deduct from your employees’ wages in certain circumstances, such as where you have stated in their employment contract that you can or where you are deducting from your employees’ wages because you have accidentally overpaid them. Your employees may instead prefer to pay some deductions via a bank transfer, and where an overpayment error stems from some time ago, you should be flexible in terms of how you require them to pay it back. 

If you need help understanding the key points to note when making deductions to your employees’ wages in the UK, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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