Help for small firms: Handling pay and wages
Handling pay and wages - Step 5: Deductions and overpayment
The law protects all workers from unauthorised deductions being taken from their pay.
To lawfully make deductions from wages or to receive payments from a worker, the deduction or payment must be:
- required or authorised by legislation. For example, income tax, National Insurance, a court order
- authorised by the worker's contract, provided the worker has been given a written copy of the relevant terms or a written explanation of them before the deduction is made
- agreed with the worker and with written consent provided by them before the deduction is made.
If a worker has been genuinely overpaid, you are entitled to reclaim the overpayment.
However, this can be a complicated area, so it is advisable not to simply deduct money from a worker's future pay to fix a mistake or overpayment. Instead, it is best to discuss and agree a repayment arrangement.
If the worker agrees, a written agreement should be made that includes:
- the reason for the overpayment
- the amount of money overpaid
- how repayments will be made (for example, deduction from pay, repayment by cheque or electronic bank transfer) and how often (this should be reasonable).
If the worker does not agree, then you should contact the Acas helpline on 0300 123 1100 to discuss your options.
Workers in retail have extra protection which means you cannot deduct more than 10% from their gross pay (unless their employment has ended and it is their final wage) if the deduction is due to cash shortages or stock deficiencies. For example, a shop worker paid a gross wage of £200 per week could have £20 at most deducted from their pay each week if they under-charged a customer/s. The worker must still agree to the deduction, or it must be authorised by their contract for you to lawfully recover the loss directly from their pay.