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Deduction from net or gross pay?

Deduction from net or gross pay?

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I would be most grateful if someone could point me towards the legislation or guidance that states deductions for (eg) damage caused by an employee must be made from net rather than from gross pay.

All previous threads seem to end in a consensus along the lines of "obviously it should come off the net" but my logic differs. The point (for me) is that the deduction is covered by the employment contract and is from pay. In the contract there is no concept of net pay, merely annual salary or hourly rate, both gross.

A client is going to tribunal and all advice given has been that deductions are from net, but the ACAS website gives an example (actually to cover dedutions from a retail employee, which have a 10% maximum deduction for shortfalls etc, but the principle is the same) which strongly suggests the deduction would be from gross pay. The wording states "There are extra protections for individuals in retail work that make it illegal for an employer to deduct more than 10% from the gross amount of any payment of wages....". ACAS made a comment to my client about the deduction being from net rather than gross, and I want to be able to show him that net is correct because of x x x, not just because everyone says so! Even more so when my logic is at variance to everyone else.

TIA for any help.

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By pawncob
23rd Oct 2014 12:39

Obviously

such deductions aren't allowable for tax purposes, so how can you justify deducting any amount from the Gross pay?

 

It's got to be Net. 

 

http://www.hmrc.gov.uk/manuals/cogmanual/cog913510.htm

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Replying to johnhemming:
By birdman
30th Oct 2014 07:20

Allowable expense?

Thanks pawncob, that covers what I was looking for, and to the others for their helpful comments (I forgot to set up post notifications and didn't know I'd had replies, hence delay, sorry!). To add a little detail, the Company collects broken-down vehicles and drivers occasionally cause damage to the recovered vehicle or surrounds which are claimed on insurance, with irrecoverable excess claimed against drivers in certain circumstances. The driver therefore incurs the expense in the performance of their duties and this is necessary as it's a contractual liability. Am I being disingenuous in suggesting it's allowable in the hands of the employee?

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By Portia Nina Levin
23rd Oct 2014 12:43

It does not matter

The employee has a personal liability to the employer. Let us call that a pecuniary liability.

They can do one of two things:

they can pay her her full pay (which is taxed and subject to NIC), and then require her to pay the full amount, which she might agree they can deduct from her net pay.they can reduce her gross pay, thus settling her pecuniary liability for her by offset. The gross pay, plus the pecuniary liability (money's worth), is liable to tax and national insurance.

An example. I am due to pay my employee £500, but because she had an accident while driving her company car on a private journey, she owes me the £100 insurance excess.

I pay her £500, deduct tax and NIC of, say £100. The net pay is £400 and I deduct the £100 she owes me, leaving her with £300.

Or I only pay her £400 (having deducted the £100 she owes me), so she is receiving £400 actual pay, plus money's worth (the discharge of the amount owed to me of £100. That is £500 in total, and so the tax and NIC is the £100. I deduct the £100 from the £400 that I am paying her, and she has £300.

The relevant legislation is in ITEPA 2003, section 62 that deems money or money's worth to be employment income.

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By DMGbus
23rd Oct 2014 13:27

Options

There might NOT be a legal obligation for the employee to pay compensation to the employer - this key point so the legal obligation needs looking at first.  

If it is unclear as to there being an obligation, but employer and employee mutually agree that there might be a moral obligation then I see it legitimate for the employer and employee to agree a lower amount (or any amount) be deducted from gross pay pre tax.

We aren't told the nature of / reason for the "compensation" deduction arising.

The employer could have suffered a loss on one or more of several fronts:

The employee broke a tool of the employers.  Many employers would not seek compenation for this or could say "we're going to take £100 off your gross pay as our compensation" or "we're going to pay you a reduced bonus because of this" or "when your next pay review comes up the damage will be taken into consideration"An employee might take time off not backed up by any justification - the compensation would be reducing gross payThe employee has a company car and is allowed private fuel [and pays BIK tax thereon] but subjectively "had too much" private fuel one month because of an excessive private mileage on a car touring holiday - gross pay again could be reduced to compensate the employer

PS.  ACAS may well be more knowledgable than us posting replies as they most likely come across the situation much more frequently than those offering answers to the question here.  I therefore would, where opposing answers are given, tend towards favouring the ACAS advice.

 

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By jndavs
23rd Oct 2014 15:02

Retail workers usually have a clause in their employment contracts which states that they are liable for any shortfalls in stock or cash. The legislation referred to by the OP (Employment Rights Act 1996) simply sets a maximum limit to the amount that may be deducted by the employer, to my knowledge it does not say that the deduction is pretax.

Wages are protected by law, the employee must agree to the deduction being made.

I agree with the majority view that the deduction is from net wages.

 

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