Pay and deductions
Here we look at some common pay elements and deductions.
Pay – including holiday pay and statutory payments
Court orders and child maintenance
Student loans and postgraduate loans
Pay for Pay As You Earn (PAYE) purposes includes things like basic wages (or salary), allowances, overtime payments, bonuses and tips. It’s important when thinking about pay to remember that you must pay your personal assistant (PA) at least the national minimum wage or national living wage.
Other payments which you may need to make and which are also treated as normal pay are:
Holiday pay – most workers are legally entitled to a minimum of 5.6 weeks paid holiday per year (known as statutory leave entitlement or annual leave).
Statutory sick pay – You may decide to pay your employee their normal pay during any periods of sickness absences, but if you do not, you may need to pay them at least the basic legal minimum level.
Statutory parental pay – Employers are also required to pay things like statutory maternity pay, statutory paternity pay and statutory adoption pay where the relevant conditions are satisfied (although you will be able to claim reimbursement from the government for most of it).
Follow the links above for more information about these elements. Please note that these matters can be complex and like other employment law issues, our information should be taken as an introductory guide only and not a comprehensive statement of the law.
As well as regular pay, you may provide other benefits or expenses to your employee, such as accommodation, a mobile phone, or travel expenses. Sometimes these can be treated as additional income on them, however as we explain in our dedicated benefits and expenses section, these are reported to HM Revenue & Customs (HMRC) differently and tax is paid to HMRC by the employee separately. Class 1A National Insurance (NIC) may be payable by the employer on these amounts, at a rate of 13.8%.
For guidance on the treatment of the various pay elements that may be due when an employee leaves, for example, statutory redundancy pay or accrued holiday pay, please see our employment law section.
If you want to make deductions from your PA’s pay, one of three conditions has to be met:
- It is required or authorised by legislation (for example, income tax or NIC)
- It is authorised by the workers’ contract – provided the worker has been given a written copy of the relevant terms or a written explanation of them before it is made
- The worker consented to it in writing before it is made.
There are exemptions from these conditions, which allow an employer to recover an overpayment of wages for example.
The law protects individuals from having unauthorised deductions made from their wages, including complete non-payment.
What all of this means is that if, say, your PA breaks your favourite vase, you will not automatically be entitled to deduct the cost of replacing it from their pay. You will only be entitled to deduct the money if it expressly states that you can do this in the contract of employment or if the PA consents to the deduction in writing before it is made.
You can find out more about unauthorised deductions on the ACAS website.
In terms of deductions that are commonly made from pay, we look at several below – please note that some are taken from your PA’s pay before tax (their gross pay), while others are taken from pay after tax (their net pay).
Your employee may be paying towards a workplace pension that you have set up or arranged access to under the auto-enrolment programme.
There are two ways that an employee can contribute to a pension:
- Under arrangements where the pension amount is deducted BEFORE tax is calculated (meaning the employee receives tax relief there and then) – known as net pay arrangements.
- Under arrangements – where the pension contribution is deducted after tax is calculated and HMRC later send the tax relief to the pension scheme – known as relief at source arrangements.
There is no NIC relief for employee pension contributions.
For more information, go to the separate section of this website dedicated to auto-enrolment.
A court can order that deductions be made directly from your employee’s net (after tax and NIC) 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 (AEOs) or sometimes Earnings Arrestment. The deduction may be a specific amount or may be calculated based on a percentage of your employee's 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.
You can find some information on AEOs on GOV.UK.
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 parent’s earnings. You can find out more about child maintenance DEOs and AEOs and what you will need to do on GOV.UK.
Before moving on, please note that with these type of orders, you are entitled to take off an extra £1 towards your administrative costs (if you want to). However you should be aware that this will reduce the worker’s pay for minimum wage purposes. You should therefore not take the deduction if it will reduce the worker’s pay under the minimum wage.
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.
More information 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 or other welfare organisation if they need help with money and debt.
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 HMRC collects repayments of particular types of loan known as Income Contingent Repayment (ICR) loans via the PAYE system.
Loan rules can vary depending on the part of the UK where and when the loan was granted. Since 2016/17 there have been 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 gross income (so income before any deductions for tax or NIC, for example) 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 2019 the income threshold for starting to make Plan 1 repayments is £18,935 a year (£1,577.91 a month or £364.13 a week).
The threshold for a Plan 2 loan is £25,725 a year (£2,143.75 a month or £494.71 per 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. Although repayments are calculated using gross income (that is, income before deductions), you deduct them from their net income.
From 6 April 2019, there is also a new loan type that you may have to deal with – a postgraduate loan (PGL). The threshold for 2019/20 is £21,000 (£1,750 a month, £404 a week). Repayments for PGL will be calculated at 6% above this.
Please note that a borrower may be liable to repay a Plan 1 or Plan 2 student loan AND a PLG concurrently, as they are separate loan products. This means that where applicable, employers will have to deduct both normal student loan and PGL deductions.
If an employee has a student loan and/or PGL to repay via the tax system, SLC will advise HMRC when a borrower is due to start repaying them. 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 HMRC's PAYE for Employers online service or you use software). If you are to stop deductions, HMRC will send a ‘stop notice’.
Each loan type will be started and stopped in its own right, so if an employee has paid off both their student loan and PGL, the employer would receive two stop notices.
If you take on a new employee who is due to make student loan/PGL repayments, check the P45 for a tick in the student loan box (you may need to check with them whether it is a Plan 1 or 2 loan or a PGL. If they do not know, ask them to confirm with the SLC). 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.
Please note that 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 or No Student Loan Deduction Prompt 2. HMRC are in the process of developing separate PGL messages.
The prompt will be delivered to your inbox along with any other GNS messages. You should check your inbox regularly to ensure you can act on any prompts or sign up for email alerts.
You can find the detailed employers student loan guidance on GOV.UK. HMRC are in the process of developing employer guidance on PGLs. If you have any questions in the meantime, you should contact the Employer Helpline.
If your employee has any questions about student loan or PGL repayments, HMRC have produced this basic guide, which may help them or you can direct them to the Low Incomes Tax Reform Groups dedicated student website.
Your employees can donate to charity directly from their pay using Payroll Giving. Donations are taken from pay BEFORE tax is calculated, meaning the employee receives tax relief (but not NIC relief) there and then. 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 net 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 your 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.
In Scotland, you can get information about credit unions by checking the website of the Scottish League of Credit Unions members.
Some employers provide childcare vouchers to their staff, which they can then use to pay for qualifying childcare. If your employee is a basic rate taxpayer, the first £55 per week of vouchers will be exempt from tax and NIC.
The vouchers are not usually provided on top of normal pay, they are usually provided in conjunction with a salary sacrifice arrangement, whereby your employee gives up the right to some salary in exchange for the voucher. Under normal circumstances, this salary would be subject to tax and National Insurance, even if it is then paid by the worker for childcare. Employer provided childcare vouchers are not subject to tax or National Insurance, so this arrangement saves most workers around 32% of the value of the vouchers in tax and National Insurance.
Please note that the tax and NIC relief on childcare vouchers will no longer be available to new members from October 2018, making way for Tax Free Childcare.
If your PA started to receive vouchers before October 2018 but then stops receiving vouchers, for example because they go on maternity leave, they will be able to resume vouchers on their return to work so long as they have not gone 52 consecutive tax weeks without receiving a voucher.
They may also be able to salary sacrifice greater amounts in the portion of the tax year when they are back at work, so as to ‘catch up’ for the vouchers not received when they were on maternity leave.
You can read more about this in our LITRG article looking at childcare vouchers and maternity leave.