Payroll Deductions: Mandatory vs Voluntary

When it comes to payroll deductions, some of them are voluntary and others mandatory. As an employer it’s important to understand what types of deductions are mandatory or voluntary so that you pay your employees correctly.

What are payroll deductions?

Payroll deductions are payments made out of an employee’s basic salary on their behalf. When working out your employees end of month pay you'll need to include payroll deductions. However, before making any there are a few conditions you need to be aware of that allow you to make payroll deductions, such as:

●       Statutory deductions that are required by British law

●       If there’s a deduction stated within the employees contract

●       Whether the employee has consented to deductions

What are mandatory deductions?

Mandatory or statutory payroll deductions are the withdrawal of a specified amount by law. These deductions include tax, National Insurance and child maintenance. 

Tax

Employers are responsible for ensuring that income tax is deducted from their employees' pay. Income tax is taken directly from personal income and will be paid if the employees’ earnings go above the UK government's personal allowance.

Personal allowance currently sits at £12,570 with any income over that being taxable. After staff exceed the tax-free personal allowance they’ll be taxed based on how much they earn in the tax year. Tax rates are split into:

●       Tax-free personal allowance - Up to £12,570 annually

●       Basic Tax Rate (20%) - On earnings between £12,571 - £50,270 annually

●       Higher Tax Rate (40%) - Earnings between £50,271 and £125,140 annually

●       Additional tax rate (45%) - Earnings over £125,140 annually

National Insurance

National Insurance is a tax that helps you pay for some state benefits, including state pension, statutory sick pay and maternity leave. National Insurance is also paid by employers as well as employees and self-employed workers.

As an employer you will need to incorporate Class 1 National Insurance contributions, as this is what will come out of your employees' pay.

Student Loan

In the UK, student loans are  government funded loans that help both part-time and full-time students pay for their university course and living expenses while studying.

While the Student Loan Company (SLC) facilitates the loans, HMRC collects repayments.

Paying back student loans depends on the date the loan was granted to an employee. There are three types of repayment groups, such as: 

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 for Plan 2 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

If you have applied to Student Finance Wales and have started your course after the 1st of September 2012 then you’ll be eligible for Plan 2 depending on whether you have:

●       Studied an undergraduate course or a Postgraduate Certificate of Education (PGCE)

●       Taken out a Postgraduate Loan plan if you’ve studied for a postgraduate master’s or doctoral course

You will be on a Postgraduate Loan plan if you’re studying a postgraduate master’s or doctoral course.

Plan 4

Plan 4 is 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.

To find out more about what plan you or your staff should be on, visit the GOV.UK website.

Court orders

Sometimes court orders can order deductions from an employees’ pay after tax. This can happen for various reasons, but is usually due to debt, fines or owing money in relation to council tax bills. These court orders are also known as Attachment of Earnings Orders (AEOs) or Earnings Arrestment.

Deductions may also be based around a specific lump sum or be based on a percentage of the employees’ net pay.

Child Maintenance

If you have employees that are a separated parent, the Child Maintenance Service or Child Support Agency (CSA) may ask for a Deduction of Earnings Order (DEOs) to help support the upbringing of the child.

Child Maintenance can also be collected through AEOs as well as DEOs. Regardless of which one is used they’re both mandatory deductions that must be paid.

For more information on Deductions of Earnings visit the GOV.UK website.

What are voluntary deductions?

Voluntary deductions require employees to give permission to their employees to make certain deductions. These deductions can include: 

Health insurance premiums

Health insurance is offered by some employers as a part of their employment benefit package. One way of doing this is through employees making voluntary contributions through their monthly pay.

The deductions can vary based on the plan each employee chooses. The health insurance benefits can cover visits to the doctors, prescriptions, scans and longer hospital stays. 

Retirement plans

Voluntary pension plans can be offered by employers on top of the mandatory National Insurance payments that go toward an employee's state pension. While employers must pay toward a workplace pension by law, they can include an optional voluntary contribution that’s made by staff members that will be deducted from their monthly pay. 

Life insurance premiums

Some employers give their staff the opportunity to pay into their life insurance premiums through their monthly salary.

Life insurance will provide family members or noted beneficiaries with a payment if the employee passes away.

Offering this to employees may make it easier for them to make contributions as they can pay in smaller amounts.

Get in touch with Payescape today to see how we can help you make your payroll processes simpler and more efficient