What's covered in this guide?
What is a deduction?
Deductions are amounts taken from an employee's gross pay, either due to statutory requirements or based on agreements between the employer and the employee. Deductions may also be made for benefits that are genuinely advantageous to the employee (e.g., pension contributions).
Note: Income Tax, National Insurance, student loan and postgraduate loan repayments are worked out automatically. They aren’t set up as Deduction Types. On the employee’s payslip, Income Tax is shown under Tax, while National Insurance and student loan repayments are shown on their own lines under Deductions. In the pay run, they’re all listed together under Taxes. Student and postgraduate loan repayments are reported and paid to HMRC along with PAYE.
Note on reports: In Payroll Costs by Location, the Total Tax column includes Income Tax, employee National Insurance and student and postgraduate loan repayments. The Employee NIC column is already included in Total Tax, so don’t add the two together. Employer NIC isn’t included in Total Tax. For a full breakdown, use the payslips, the P32 report or the Activity Details report, which show student loan repayments separately.
When creating a deduction type under the Statutory Deduction option, the available types are:
Salary Sacrifice
Pension Salary Sacrifice
Direct Earnings Attachment
Attachment Earnings Order
Other deductions can be set up as Pre-Tax or Standard/Voluntary. Don’t use a deduction for pension contributions: deductions aren’t sent to Nest or included in the PAPDIS file. To change how much an employee pays into their pension, see How UK Pension Auto-Enrolment Works.
Access deduction types
You can view and manage deduction types through Payroll > Payroll Settings > Deduction Types.
Create a deduction type
To create a deduction type:
Navigate to Payroll > Settings > Deduction Types and click the + New button.
When creating a new deduction type, enter the following fields:
Name (as it will appear on the payslip)
Journal Account (choose from any accounts set up in your journal)
Deduction type group - choose one of:
Statutory Deduction (Salary Sacrifice, Pension Salary Sacrifice, Direct Earnings Attachment, or Attachment of Earnings Order)
Pre-Tax Deduction - reduces taxable income before tax is calculated; typically used for pension contributions and similar deductions
Standard/Voluntary Deduction - taken after tax
Click Create to save.
Assign deductions to employees
Once a deduction has been created, add it to the profiles of the applicable employees.
Navigate to Staff and select the employee
Open their Payroll Details tab
Click Add next to the Deductions section
Select the relevant Deduction Type from the dropdown list
Choose Fixed amount or Percent of Income and enter the value to be taken when the deduction is applied
Optionally, set a cap for the deduction amount
Optionally, set the dates the deduction will apply from or to
Click Create
Capped Deductions
Deductions can be capped, meaning you can set a maximum amount that will be deducted over time. Once the total amount deducted reaches the cap, the deduction will stop applying.
This allows for more control over deductions, ensuring they only apply until the specified limit is reached. As each pay run is posted, the "Amount Paid So Far" will be updated to help track progress toward the cap.
Date-Driven Deductions
Deductions can be date-driven, meaning you can set a start date for either a deduction template or a recurring tax template to begin applying and another date for the template to finish applying.
This provides greater flexibility in managing deductions and ensures they are applied only during the relevant period.
How deductions appear on pay runs
After assigning deductions to relevant employees, the deductions will appear on their pay runs.
To view the applying deductions:
Navigate to the current pay run through the Run Payroll tab
Select an employee from the list included in the pay run
Scroll down to the Deductions section to view which deductions are applying, the account they're paid out of, and the amount being deducted
How deductions appear on payslips
Employees with deductions applying to their wages will have this clearly visible on their payslips, including the deduction type/name and the amount.
Payslips can be previewed in each employee's individual pay run summary.
Once the payslip is downloaded, the Deductions section appears directly below the Tax section as its own separate section.
Student loan repayments are listed separately from Income Tax and National Insurance in the Deductions section, providing clarity on the breakdown of PAYE deductions.
