Statutory payroll deductions: The 4 mandatory examples

In this guide to payroll deductions, we’ll explain what a statutory deduction is, as well as how to apply this knowledge to ensure that your salary deductions are in line with current. 

What are statutory deductions? 

Statutory deductions are mandatory contributions taken from an employee’s salary during the payroll process. They include tax, National Insurance, pension contributions and student loans, and are used to fund public services. As employers are legally obligated to ensure that statutory payroll deductions are made accurately and on time, they can be automatically deducted without the employee’s express permission. 

When can you make a statutory deduction? 

There are three scenarios in which employers can make statutory deductions: 

• Where required by UK law, such as tax and National Insurance contributions
• When there is a deduction stated in the employee’s contract, such as pension contributions or union membership fees
• When the employee has consented to deductions, such as charitable donations or additional voluntary pension contributions

Why are payroll deductions made? 

There are a variety of different payroll deductions, each of which serves a specific purpose. They’re used to fund public services and social welfare systems, including healthcare, education, state pensions and unemployment benefits. Salary deductions are governed by relevant legislation to ensure that employers comply with their legal responsibilities and make appropriate contributions to these national programs. 

What are the mandatory salary deductions? 

Staying on top of payroll legislation can be difficult, as the laws and regulations are continually changing to better reflect economic conditions and support societal needs. However, it’s essential that you understand what statutory deductions are and how they apply to your workforce to ensure that your business complies with UK government law.

Let’s look at what the different statutory deductions are in more detail.

Let’s look at what the different statutory deductions are in more detail. 

1. Income tax

Income tax is a statutory deduction that is taken from an employee’s salary to fund government services and public infrastructure. It’s calculated based on an employee’s annual earnings and is deducted through Pay As You Earn (PAYE). The amount of tax deducted depends on how much employees earn annually. Different tax thresholds set by the government determine how much of the income is taxable, and at what rate. 

For the tax year 2024/2025, each individual has a Personal Allowance of up to £12,570 that isn’t taxed, after which the basic rate of 20% applies. Income between £50,271 and £125,140 is taxed at the higher rate of 40%, while income over this amount is taxed at the additional rate of 45%. 

2. National Insurance

National Insurance (NI) is a compulsory payroll deduction that funds and supports various state services, including the NHS and unemployment benefits. Both employees and employers contribute to National Insurance. Employees' contributions are deducted directly from their salaries, while employers make separate payments based on the wages they pay their staff.

Employers should incorporate Class 1 National Insurance salary deductions into their employees’ paychecks. There are different National Insurance rates, which are based on the employee’s NI category letter, and how much of their earnings falls within each band. Ensuring accurate NI deductions is essential for compliance with UK law and the continued support of these vital public services.

3. Pension contributions

Pension contributions are statutory deductions that are taken directly from an employee’s salary and placed into their company pension scheme. This is a critical part of ensuring that employees build up savings for their retirement over the course of their employment.

Employers are legally required to automatically enrol all eligible employees into a workplace pension, helping them to save for their retirement. Contribution rates vary based on the employee’s contract and employment status, but there are statutory minimum rates set out by the UK government.

4. Student loans

Student loans are provided by the government to cover the tuition fees and living costs of those pursuing higher education, and are paid back once the individual’s earnings exceed a certain threshold. This is another payroll deduction that is automatically taken by employers, and is determined by the employee’s specific student loan plan and annual thresholds. 

The different student loan plans are: 

• Plan 1: For students who started their course before 1 September 2012 in England and Wales 
• Plan 2: For students who started their course on or after 1 September 2012 in England and Wales 
• Plan 4: For students in Scotland 
• Plan 5: For new students starting courses in England from 2023 
• Postgraduate: For postgraduate loans 

With Plan 5 having been recently introduced, it’s important that you update your payroll records regularly to ensure accurate salary deductions.

What are voluntary deductions? 

As well as your mandatory payroll deductions, it’s also important to consider which, if any, voluntary deductions you wish to offer to your employees. These are optional contributions that are agreed between employers and employees, and can help to provide additional benefits and incentives. Here are some examples of the most common voluntary deductions. 

1. Pension plans

Although pension contributions are a statutory deduction required by UK law, employees may wish to contribute more, allowing them to better save for their retirement. The process is sometimes referred to as ‘salary sacrifice’, as a portion of the employee’s earnings is exchanged for pension contributions, and may be offered by employers through private pensions providers. 

2. Health insurance schemes

Employers may choose to offer health insurance schemes for their employees, giving them access to private medical care and specialist treatments. To cover the cost of the employee’s membership in these health insurance schemes, a payroll deduction is taken from their salary, usually on a monthly basis. 

3. Employee benefits

To support employee satisfaction and retention, employers may provide access to a variety of additional benefits, such as gym memberships, cycle to work schemes and childcare vouchers. Employees can opt into these benefits, choosing the options that best suit their needs. The cost of these benefits is then covered by salary deductions from their payslips.