Payslips and deductions
This page explains more about payslips such as what information they should include and how to create one for your employee.
What is a payslip?
Where do I get payslips for my employees?
Understanding a payslip
Other deductions on a payslip
An employee has the right to know the amount they will be paid, how often and by what method (e.g. every Friday, in cash, by cheque or directly to a bank) – typically these terms will be set out in the employment contract or written particulars.
They are also entitled to receive an individual, detailed written pay statement each time you pay them. It must show specific items, including:
- the employee's gross pay (before any deductions are made)
- any fixed deductions, e.g. trade union subscriptions
- any variable deductions, e.g. tax
- the net amount payable after the deductions have been made (‘take home pay’)
- the amount and method for any part payment of wage (for example separate figures of a cash payment and the balance credited to a bank account).
For completeness, you might include additional information on your employee’s payslip which you are not required to provide by law, such as:
- National Insurance number
- tax code
- pay rate (either annual or hourly etc.), and
- breakdown of additional payments like overtime, tips or bonuses, which must in any case be included in the gross pay figure.
- Depending on the employee's circumstances you may also need to include other payments and deductions on their payslip, for example Statutory Sick Pay, Statutory Maternity Pay, or Student Loan deductions.
Giving an employee a payslip is a legal requirement and you must issue it at, or before, the time you pay your employee. Please note that this is the case even if you are not required to make tax or NIC deductions under PAYE. This is because your employee may still need an official record of their earnings should they need to do things like complete a tax return, claim state benefits or seek loans or other finance.
Payslips can be on paper (blank payslips can be purchased from most stationers) or in an electronic format (e.g. by email).
If you are using payroll software, in most cases this will produce a payslip for you that you can email to your employee or print off and give to them. However, if you are using HMRC’s free Basic PAYE Tools package, then you should know that a payslip is not created as a part of this.
Therefore we have developed a payslip tool which you can use in conjunction with HMRC’s Basic PAYE Tools package to create a payslip.
Knowing your way around your employees’ payslips will help you understand whether they have been paid correctly and that the right amounts of tax and National Insurance have been paid on their behalf, so that you can explain things to them if necessary. You should encourage your employees to keep their payslips somewhere safe in case they need them.
As such, the following breakdown may assist you to understand the various elements of a standard payslip as created by the payslip tool:
1. Employer Name
2. Employee's personal information
Your employee’s name and sometimes their home address will be shown.
3. The tax year
Remember tax year runs from 6 April in one year to 5th April in the next. Usually this will be shown as four figures – 2016/17, or two 16/17. Please note that sometimes the tax year will show as the first year that the tax year covers. For example 2016/17 is 2016 (2015/16 would have been 2015). This follows the same system adopted when the government Finance Acts are produced each year – for example Finance Act 2016 is mainly concerned with the 2016/17 tax year.
4. Employee's payroll number
If you have more than one employee you might find it helpful to allocate payroll, or employee numbers to them to help identify them.
The number here represents the tax period for that payslip, for example if you are paid weekly in 2016/17 then week 01 is week from 6th April to 12th April. If you are paid monthly, then month 01 is April and month 12 is March.
Remember that we use the week or month that includes the payday. For example if your employee is paid on the 8th April 2016 but for the week 28 March – 3 April 2014, the payday will fall in week number 1 of the 2016/17 tax year. If they are paid on the 15 April 2016 for the week 4 – 10 April 2016, this will be week number 2 and so on.
6. Tax code
Your employee’s tax code will be sent to you by HMRC (either in the post or by an internet notification if you are registered to use PAYE for Employers). It is the code that tells you how much tax-free pay your employee should get before deducting tax from the rest. If the code is wrong, your employee could end up paying too much or too little tax, so you should encourage them to check their notification of tax code and talk to HMRC if there are any problems.
This is usually shown on a payslip.
This will show how much your employee has earned in wages before any deductions are made. It might also show how their pay was calculated, for example hourly rate and the number of hours worked. It could also show any extra payments they have earned on top of basic pay like bonuses, or overtime.
9. Deductions – tax and National Insurance
Your payslip must show the amount of variable deductions, like tax and National Insurance, and any contributions your employee is making to a workplace pension. See more on deductions below.
10. Summary of the year to date
Some payslips will have a section which shows how much your employee has been paid so far in this financial year (from 6 April to 5 April). It might also show totals for how much your employee has paid in tax, National Insurance, Student Loans and pensions.
11. Net pay – what is left
The most important figure on the payslip for most people is their take-home pay. This is the amount your employee actually receives once all the deductions have been made.
12. Method of payment
The payslip may also show the method of payment, e.g. cash, bank transfer etc.
13. Important messages
Some employers use a space on the payslip for important messages. These may give your employee extra information about their pay or other information they want to share.
If your employee is paying towards a workplace pension that you have set up or arranged access to, the amount your employee is contributing will be shown. If you are contributing too, that may also be shown.
If you have not yet organised a workplace pension for your employee you will have to by law once the auto-enrolment rules apply to you. This will probably be by 1 April 2017 at the latest unless you became an employer for the first time after April 2012 in which case this will be at some point between 1 May 2017 and 1 February 2018.
These rules mean that broadly, employers have to automatically enrol their workers into a pension scheme if they are between the age of 22 and state pension age, work in the UK, and earn more than the threshold, which is currently set at £10,000.
There are no exceptions even for the smallest employers.
Although auto-enrolment may be some time away for you, it is best to get ready early.
We have a separate section of this website dedicated to the basics of auto-enrolment.
A court can order that deductions be made directly from your employee’s pay, for example because he has incurred a debt or fine or is in arrears with a Council Tax bill.These are known as Attachment of Earnings Orders (AEO). The deduction may be a specific amount or may be calculated based on a percentage of your employees net pay – for example if your employee’s net monthly pay is under £300, the deduction rate will be 0%, if it is between £300 and £550, the deduction rate is 3% and so on.
Her Majesty's Court Services has produced an employer guide on how to comply with AEOs.
The Child Maintenance Service or Child Support Agency (CSA) can ask for a Deduction from Earnings Order (DEOs) for the maintenance of a child. They may also ask you to provide information about your employee, which you must give if you are asked for it. Attachment of Earnings Orders, as described above, are another way of collecting child maintenance from a paying parent’s earnings or pension. You can find out more about child maintenance DEOs and AEOs and what you will need to do on GOV.UK.
Since 6 April 2013, the Department for Work and Pensions (DWP) also has the ability to recover overpaid benefits by deduction from an individual’s earnings. These are called Direct Earnings Attachments (DEA). The DWP will write to you if you need to make DEA deductions and tell you what you need to do.
Please note that there is an exemption for making DEA deductions for ‘micro employers’ (those with fewer than 10 employees) who were in existence before April 2013, or were a ‘new’ employer before 31st March 2014.
More information, and detailed guidance on DEAs, is available on GOV.UK.
Please note that you may also be asked to make deductions for Housing Benefit overpayments an employee owes – such a request will come from your employee’s local authority, not DWP.
You may be concerned that making these type of deductions will place your employee in hardship. However if you receive an order, you must comply with it – under some orders, you may be fined or prosecuted if you do not. You can perhaps suggest that your employee talks to an experienced adviser at a Citizens Advice Bureau or other welfare organisation if they need help with money and debt.
Saying that, before you get too concerned about having to make these kind of deductions from your employee’s earnings, please be aware that it would probably be quite rare for you to have to do this. These attachment orders are usually a matter of last resort, used only where it has not been possible to make alternative arrangements.
Students in higher and further education (including part time study) in the UK can get government-funded loans to help with their course fees and expenses while they are studying. The Student Loans Company (SLC) makes the loans and HM Revenue & Customs (HMRC) collects repayments of particular types of loan known as Income Contingent Repayment (ICR) loans.
Loan rules can vary depending on the part of the UK where and when the loan was granted. With effect from 2016/17 there are two plan types for student loan repayments, plan 2 (for English and Welsh students who started their course after 1 September 2012) and plan 1 (for all other circumstances).
Students start repaying their students loans once they have left their course and their income is more than a certain amount – the threshold. If their income is high enough, their repayments start in the April after they leave their course.
From 6 April 2016 the income threshold for starting to make Plan 1 repayments is £17,495 a year (£1,457 a month or £336 a week). Once an employee's income goes above the threshold, you deduct 9 per cent of their income that is above the threshold and pay it to HMRC (who pass it to the SLC). This goes towards repaying their loan.
The thresholds for a Plan 2 loan are £21,000 a year (£1750 a month or £403 per week).
If an employee has a student loan to repay via the tax system, SLC will advise HMRC when a borrower is due to start repaying a student loan. HMRC will in turn contact you by sending you a ‘start notice’ (either by post or by an internet notification if you are registered to use PAYE for Employers). If you are to stop deductions, HMRC will send a ‘stop notice’.
If you take on a new employee who is due to make student loan repayments, check the P45 for a tick in the Student Loan box (check with them whether it is a Plan 1 or Plan 2 loan if they don’t know, ask them to confirm with the Student Loan Company) or if they don’t have a P45 make sure they tell you about their student loan position as part of the ‘starter’ information they should give you. You should start making deductions without waiting for a ‘start notice’ from HMRC.
From 6 April 2016, if you are an online filer, HMRC will send a generic notification if you don’t report any student loan deductions for a specific employee when a deduction is expected in your payroll submission. The generic notification is a prompt for you to check and make the correct deductions for future pay periods.
The notifications will be titled: No Student Loan Deduction Prompt 1 and No Student Loan Deduction Prompt 2.
The prompt will be delivered to your inbox along with your GNS messages. You should check your inbox regularly to ensure you can act on any prompts.
You can find the employers Student Loan guidance on GOV.UK.
If your employee has any questions about the Student Loan repayments, HMRC have produced this basic guide, which may help them.
Your employees can donate to charity directly from their pay before tax is deducted using Payroll Giving. You can find out more about Payroll Giving on the LITRG website. You can find information on setting up a scheme on GOV.UK.
In a time of hard to come by affordable credit and pay day loan sharks, some employers are helping employees to save by setting up a payroll deduction into a credit union savings account. The theory is that this presents a convenient and safe route into saving for employees (credit unions are not-for-profit financial cooperatives and savings are covered by the Financial Services Compensation Scheme). In addition, once the savings account is opened and the link between the employee and credit union established, the credit union may then be another avenue to explore in terms of a loan for the employee, if one is required.
The process of taking savings from an employee’s pay is straightforward and little other input is required from the employer once things are set up, however there is absolutely no obligation on you to help you employee in this way if you do not wish to.
If this is something that you are interested in looking into however, then the credit unions have lots of help and information for employers on setting up an account and making the payroll deduction. The first step is to contact a credit union.
You can get information about credit unions from the Association of British Credit Unions (ABCUL) website or the ACE Credit Union Services website.
In Scotland, you can get information about credit unions by checking the website of the Scottish League of Credit Unions members.