Deductions from wages – the traffic light guide

News on 16 October 2019

When you employ people there will be occasions where you think that you should deduct money from their wages.

Are you actually allowed to do this or could it land you in a bit of hot water?

Red light!

Before you make any deductions from an employee’s wages you need to tick a few boxes.

We’re not just telling you to do this because HR people like to make managers jump through hoops. If you take money from an employee and you’re not legally allowed to do it, the employee might be able to bring a claim to an employment tribunal.

You might be really annoyed because the employee has lost their company mobile phone, but you will need to make provision for this in your employment contract if you want to deduct wages for the loss you incur.

Amber light!

When can I make a deduction?

The legal reasons you can make a deduction from someone’s wages include:

1)     When the law requires you to do it

  • This will be things like national insurance, tax, student loan repayments etc.

2)     If you’ve made a mistake and overpaid someone;

3)     If the signed employment contract says you can;

  • You can’t rely on an employment contract if it is not signed by the employee. So make sure everyone you employ returns a signed copy of their contract.

4)     If the employee has given you written consent;

  • This could be a signed form that says that you can make the deductions or a letter from the employee;

5)     If they’ve missed work to be on strike or take industrial action.

I’ve got a legal reason to make the deduction - what next?

You need to have a look at your employee’s pay and how much they owe you. If you recover everything they owe you in one go, will this mean their wages are less than the national minimum wage (NMW)? If your answer is “yes”, then put the brakes on.

You shouldn’t deduct anything from someone’s wages if it will make their pay fall below NMW. This could mean that your business could be fined for paying less than the NMW.

The deduction could be for any of the following:

  • Tax or national insurance;
  • Repayment of a loan or an advance in wages;
  • Buying shares in the business;
  • Their pension contributions or union subscription; or
  • An overpayment you’ve made by mistake.

Get ready…

Legal reason to make the deduction

Wages don’t fall below NMW 

There are just two more boxes before you get the green light.

Look at how much you are deducting; what does that leave the employee with until they’re paid next? Yes, they owe you money, but don’t put someone in a position where they can’t afford to pay their bills or go food shopping. A lot of people live on a budget so be mindful not to cause any detriment to anyone.

No detriment 

Last piece of the puzzle coming up! Write to them to tell them how much they owe you in total and how the repayment will work. If they owe you £100 and you plan on spreading the deductions over 4 months, then tell them that they’ll have a £25 deduct for 4 months and when the deductions will start.

Green light!

Now you’ve got the green light, you can proceed with the deduction.


“An employee owes me money, but I don’t know what to do!” If this sounds familiar don’t feel like you’ve got to do this on your own – we’re here to help!

Give us a call to find out how we can help you.