Mandatory vs Voluntary Payroll Deductions
Accurate payroll processing is essential for every business. One of the most important responsibilities for employers is managing payroll deductions. Some are required by law, while others are optional and agreed to by the employee. If these aren’t handled correctly, it can lead to compliance issues, fines, and unhappy employees.
What Are Payroll Deductions?
Payroll deductions are amounts taken from an employee’s gross salary before they receive their final pay. These deductions fall into two categories:
- Mandatory deductions: Required by UK law (e.g. Income Tax, National Insurance)
- Voluntary deductions: Authorised by the employee (e.g. health insurance, extra pension contributions)
- Employers must ensure all deductions are legally applied and calculated correctly.
- Mandatory Payroll Deductions
- Income Tax (PAYE)
Employers are legally responsible for deducting income tax under the PAYE system. For the 2025/26 tax year, employees are entitled to a personal allowance of £12,570. Earnings above that are taxed at:
- 20% on income between £12,571 and £50,270
- 40% on income between £50,271 and £125,140
- 45% on income over £125,140
National Insurance Contributions
Both employers and employees pay National Insurance contributions. These contributions go toward funding state benefits such as the pension, maternity pay, and sick pay. Class 1 NICs, which apply to most employees, must be deducted through payroll.
Student Loan Repayments
Student loan deductions depend on how much the employee earns and which repayment plan they’re on. These include Plan 1, Plan 2, Plan 4, Plan 5, and the Postgraduate Loan Plan. Each has different thresholds and repayment rates, and employers must ensure the correct plan is applied via payroll.
Plan 1: To be eligible for Plan 1 you will need to have started your university course before the 1st of September 2012. You may also be on plan one if you applied for Student finance in Northern Ireland.
Plan 2: You’re eligible if:
- You have applied to Student finance England
- You started your course between the 1st of September 2012 and the 31st of July 2023
- You’re studying an undergraduate course
- You’re studying a Postgraduate Certificate of Education (PGCE)
- You have taken out an Advanced Learner Loan
- If you have taken out a Higher Education Short Course Loan
Plan 4: Applicable for those that have applied to Student Awards Agency Scotland.
Plan 5: Those eligible for Plan 5 will need to have:
- Applied to Student finance England
- Started their course after the 1st August 2023
- Started studying an undergraduate course
- Started studying a Postgraduate Certificate of Education (PGCE)
- Taken out an Advanced Learner Loan
For those on a Postgraduate Loan plan due to studying a postgraduate master’s or doctoral course or have taken out a Higher Education Short Course Loan will need to be put on plan 2.
Court Orders
If an employee is subject to a court order such as an Attachment of Earnings Order (AEO) or a Deduction of Earnings Order (DEO). Employers are legally required to make these deductions from net pay. These are often used to recover unpaid debts, fines, or council tax.
Child Maintenance
When an employee is required to pay child maintenance, a DEO may be issued by the Child Maintenance Service. This is a legal deduction that must be prioritised in the payroll process.
Voluntary Payroll Deductions
Voluntary deductions are made with the employee’s consent and are typically part of an employer’s benefits package.
Health Insurance
Some businesses offer private health insurance as an optional benefit, with premiums deducted directly from salary. These deductions are based on the level of cover chosen by the employee.
Pension Contributions
While auto-enrolment requires minimum contributions to a workplace pension, many employees choose to contribute more voluntarily. These additional contributions are also handled through payroll.
Life Insurance
Life insurance schemes may be offered as an additional employee benefit, allowing staff to make monthly contributions via salary deduction. This provides peace of mind for employees and support for their families in the event of death.
Can Payroll Software Help Manage Payroll Deductions?
Managing payroll deductions involves calculating and withholding the correct amounts for PAYE, National Insurance, student loans, and other statutory or voluntary deductions. It requires accuracy, up-to-date knowledge of HMRC regulations, and clear reporting to avoid penalties and maintain employee trust.
PayEscape offers three payroll services to suit different business needs:
Payroll Software-Only: Ideal for businesses with in-house payroll staff. Our software automates deduction calculations, ensures compliance with HMRC rules, and integrates with your HR and time tracking systems.
Outsourced Payroll: Perfect for businesses that want to reduce admin but keep some control. You provide the data, we handle the processing, accurate deductions, HMRC submissions, and full visibility through our secure platform.
Fully Managed Payroll: For a completely hands-off approach. Our payroll experts manage everything from deductions and payslips to compliance and reporting, ensuring peace of mind and accuracy every step of the way. Get in touch with PayEscape to discuss your payroll needs or book a demo to see how it works.
What are the most common payroll deductions in the UK?
The most common payroll deductions include Income Tax, National Insurance, student loan repayments, pension contributions, and child maintenance. These can be mandatory or voluntary depending on the employee’s circumstances.
Do all employees have payroll deductions?
Most employees will have at least some deductions, typically tax and National Insurance. Additional deductions depend on things like student loans, benefit choices, or court orders.
How can payroll software help with deductions?
Payroll software automates the calculation and application of deductions, reducing human error and ensuring compliance with the latest tax laws. It also streamlines reporting and integrates with HR systems for a more efficient payroll process.
What happens if payroll deductions are calculated incorrectly?
Incorrect deductions can lead to legal penalties, fines, and employee complaints. They can also trigger HMRC investigations. Using reliable payroll software or outsourcing to a compliant payroll provider helps prevent these issues.
