What you can legally deduct from an employee's pay

Almost every small employer eventually reaches for the payroll as a way of settling something. The till was down. The van came back with a dent. Somebody was overpaid for three months. Somebody walked out without working their notice, having just had the company pay for a course.

Taking it out of their wages feels like the obvious remedy, and in a fair number of those situations it is unlawful. Worse, when a deduction is found to be unlawful you generally lose the money permanently, even where the employee genuinely owed it. That is the part nobody expects.

The rule, in one sentence

Section 13 of the Employment Rights Act 1996 says an employer must not make a deduction from a worker's wages unless it is required or authorised by a statutory provision, or authorised by a relevant provision of the worker's contract, or the worker has previously signified in writing their agreement to it.

The word doing all the work in that sentence is previously. Written consent obtained after the till came up short is not consent for these purposes. Neither is a signature on a form handed over on the day you make the deduction. The agreement has to exist before the event that gives rise to it.

The three lawful routes

Statute. Income tax and National Insurance under PAYE, student loan repayments, attachment of earnings orders, and pension contributions under auto-enrolment. Nothing to arrange here; these come out whether anyone agrees or not.

The contract. A clear written clause in the employment contract permitting the specific deduction. It has to be a genuine term of the contract, and the worker must have been given a copy of the term in writing, or notified in writing of its existence and effect, before the deduction is made. A clause buried in a handbook that nobody has been given, and that the contract does not incorporate, is a weak foundation.

Prior written consent. A separate signed agreement, before the event. This is the route for one-off situations the contract never anticipated: a salary advance, a season ticket loan, a training agreement signed on the day the course is booked.

A signature obtained after the money went missing is not consent. It is a receipt for an argument you are going to lose.

Overpaid wages: the exception most employers do not know they have

There is one significant carve-out. Section 14 takes deductions made to reimburse the employer for an overpayment of wages or expenses outside the section 13 protection altogether. So in law you do not need written consent to correct an overpayment.

That is not the same as being able to do whatever you like. The employee can still resist recovery of an old, employer-caused overpayment they reasonably believed was theirs and have already spent, and taking the whole lot back out of one month's pay is how a recoverable overpayment turns into a grievance and then a resignation. The sensible route is to write to them, set out what happened, and agree a repayment schedule in writing over a period that roughly matches how long the overpayment ran.

Retail: the 10% cap and the twelve-month clock

If the worker is in retail employment, meaning their job involves retail transactions or handling cash and stock, extra rules apply on top of everything above. This catches shops, bars, cafés, salons and delivery work, not just tills.

Even where you have a perfectly valid contractual right to deduct, section 18(1) caps deductions on account of cash shortages or stock deficiencies at one tenth of the gross wages payable on that pay day. And section 18(2) gives you twelve months from the date you established the shortage to make the deduction; miss that window and the right lapses. Section 22 lifts the 10% cap on the final instalment of wages when someone leaves, which is the one point at which you can take the balance.

A worked example. A shop assistant on £2,000 gross a month is responsible for a till that comes up £340 short. There is a properly drafted, previously signed clause covering cash shortages. The maximum you can deduct on that pay day is 10% of £2,000, so £200. The remaining £140 comes off the following month. Deducting the full £340 in one go would be unlawful even though the underlying right to recover it was valid, and would put the whole £340 at risk. With no prior written clause at all, none of it is deductible from pay, and your remedy is to ask, or to sue in the civil courts.

Where it most often goes wrong

Uniforms, tools and PPE. Personal protective equipment must be provided free; you cannot charge for it or deduct for it. Uniform costs and tool deductions are lawful with the right paperwork, but they reduce the pay that counts towards the minimum wage, which is the trap covered in the minimum wage traps that catch small employers out.

Training clawback. Recoverable only under an express written agreement signed before the training, and it needs to be a proportionate, tapering estimate of your actual loss rather than a round number designed to deter people from leaving. A flat sum that bears no relation to the cost is at risk of being unenforceable as a penalty, as the training we paid for sets out.

Notice not worked. You can only deduct for unworked notice if the contract expressly says so. Without that clause, an employee who walks out owes you damages in principle and nothing you can take from the payroll in practice.

Damage to vehicles and kit. Same answer: express clause plus, ideally, prior written consent to the specific amount, and still subject to the minimum wage floor.

What it costs to get wrong

An employee brings an unlawful deduction claim in the employment tribunal, normally within three months less one day of the deduction, or of the last in a series of deductions, with ACAS early conciliation first. There is no minimum service requirement and no fee.

If the tribunal finds the deduction unlawful it orders repayment, and section 25(4) then prevents the employer from recovering that sum by any other means. The debt does not survive. You pay back the £340 and you cannot sue for it afterwards. That asymmetry is why the paperwork is worth doing properly.

What to do this week

Pull out your employment contract template and check it actually contains a deductions clause covering overpayments, unreturned property, unworked notice and, if relevant, cash and stock shortages. If it does not, add it, and issue the change properly rather than assuming it applies retrospectively. Draft a one-page consent form for advances and loans. Diarise any known shortage so the twelve-month clock does not run out. And before any deduction, ask two questions: was this agreed in writing beforehand, and does what is left still clear the minimum wage. If either answer is no, do not process it. Start with whether your first hire needs a written contract at all if you have not got that far yet.

Common questions

Can an employer deduct money from wages without permission?

Only in limited cases. Deductions required by statute, such as PAYE tax, National Insurance, student loan repayments, attachment of earnings orders and auto-enrolment pension contributions, need no agreement. Beyond those, a deduction is lawful only if a written term of the employment contract authorises it and the worker was given that term in writing beforehand, or the worker signed their agreement before the event. The one significant exception is recovering an overpayment of wages or expenses, which falls outside the protection entirely, though even then it is far safer to write to the employee and agree a repayment schedule rather than take it in one go.

Can I take a till shortage out of someone's wages?

Only with a contractual clause or written consent agreed before the shortage, and then only within strict limits. For workers in retail employment, deductions on account of cash shortages or stock deficiencies cannot exceed one tenth of the gross wages payable on that pay day, so on £2,000 gross the maximum is £200 however large the shortage. You also have twelve months from establishing the shortage to make the deduction. The 10% cap is lifted on the final instalment of wages when the person leaves. Without a prior written right, none of it can come off the payroll at all.

Can I deduct notice that an employee did not work?

Only if the contract contains an express clause allowing it. Many small employers assume the right is automatic because the employee has clearly breached their notice obligation, and it is not. Without a clause, you are left with a claim for damages in the civil courts, which for a week or two of notice is almost never worth pursuing. If you do have a clause, the deduction still cannot take the employee's pay for the period below the national minimum wage for the hours they actually worked. The fix is a properly drafted contract before the next hire, not an argument at the end of this one.

How long does an employee have to challenge a deduction?

Normally three months less one day from the date of the deduction, or from the last deduction in a series, with ACAS early conciliation required before a tribunal claim is lodged, which pauses the clock. There is no qualifying period of service and no tribunal fee, so this is one of the most accessible claims an employee can bring. If the tribunal finds the deduction unlawful it orders the employer to repay it, and the employer is then barred from recovering that sum by any other route, including a civil claim, even where the employee genuinely owed the money.