Deductions before taxes: a guide for human resources and payroll managers

“Nothing is safe except death and taxes” is a famous event by Benjamin Franklin, one of the founding parents of America.

As human resources and payroll managers, tax management can be full of uncertainty. This is especially true for deductions before taxes in the United Kingdom, where laws and requirements constantly change.

In this article, we are going to reduce this uncertainty.

Keep reading to know what deductions are before taxes, see some examples of payroll deductions and discover how to manage them.

This is what we cover:

What is a deduction before taxes?

A deduction before tax is the money taken from the gross salary of the employees before the income tax is calculated. They are required by British law, included in a contract or agreed in writing.

An important thing to consider when solving how much tax is deduced from a salary is that any deduction should not leave the payment of employees below the National minimum wage.

There are two main types of deductions before taxes:

• Legal or involuntarywhich must be deduced from the payment of employees by law.
• Non -statutory or volunteer tax deductionsthat employers are not legally required. On the other hand, employers and employees agree in writing on which non -state tax deductions should be applied.

Examples of legal payroll deductions before taxes

If you have heard the question “How much tax is deduced from the salary?” Of your employees, there are a number of deductions for them and for you to take into account.

One to remember is in the rates and tax thresholds: verify HMRC website For the last details.

Here are some more deductions to consider.

Income tax

The Pay As Your (Paye) system guarantees that the Income Tax is collected uniformly during the year.

When resolving how much tax is deduced from a salary, it is important to realize that there is no single formula for all.

The deduction of each employee will be different, depending on their circumstances. For example, how much they earn (fiscal band) and their tax code.

Tax codes

Tax codes are made up of letters and numbers. They are used to inform you of the tax free allocation of an employee.

You must apply the correct tax code to each employee, otherwise, they can end up paying too much taxes or underground taxes.

National Insurance Contributions

National Insurance Contributions (NIC) in the United Kingdom are used to finance government services, such as state pension and NHS.

The amount of NIC that deduces from the salary of its employees varies according to how much they earn.

Employees who win more than £ 242 per week will have a deduced class 1 nic (unless they are higher than the state pension age, when they will not pay national insurance).

Pensions

Pension contributions can be deducted from the gross salary of employees (net payment agreement) or after salaries are taxed (relief at the source).

By law, employers must automatically register (known as automatic registration employees) who earn more than £ 10,000 per year and are between 22 years old and the state of state pensions of the United Kingdom in a pension plan in the workplace.

You must deduce a certain percentage (normally around 5%) from the payment of employees to add to your pension boat.

Choosing to get out of a pension in the workplace

Automatic registration in a pension in the workplace of the United Kingdom does not mean that an employee has to continue with the pension plan. They can choose not to participate in giving your employer an exclusion notice.

If the exclusion notice is received within a month after the employee’s start work, they obtain a complete refund of the pension contribution deduced by the payroll.

If they are chosen after a month, their contributions remain in the pension pot until they retire.

Examples of non -statutory deductions before taxes

Roster

Employees in the United Kingdom can choose to donate money to a cause that is close to their heart with payroll donation.

This tax -free donation is done through Paye and is deduced from the gross salary of employees. The donation is sent directly to the beneficial organization.

Salary sacrifice

The salary sacrifice scheme is where an employee chooses to give up part of his gross salary to help pay things such as a bicycle or child care.

You must verify that the salary of your employees does not fall below the national minimum wage after participating in the scheme.

Examples of payroll deductions of salary sacrifice

Voluntary pension contributions

Employees in the United Kingdom have the option of recharging their pensions paying more in their pension fund.

If an employee chooses to make additional pension payments, he must calculate the percentage and take the necessary deduction of his salary.

Nursery scheme in the workplace

Employees can use their deductions before taxes to pay nursery rates.

After an employee chooses a nursery, he deduces the amount agreed on the salary of his employees and sends it directly to the nursery.

Work cycle scheme

If an employee wants to travel to work by bicycle, he can take advantage of the scheme of the United Kingdom cycle to work.

Human resources managers begin to inform employees about cycle scheme suppliers that the business has chosen. The payroll equipment then makes the necessary deductions for those employees who are recorded and maintained the required records.

Techscheme

This salary sacrifice helps employees buy technology, such as phones and laptops.

After the business is registered with technology suppliers, the employee chooses the technology he needs and signs the necessary agreements. The payroll team deduces the amount agreed on the salary before employee taxes.

How to manage payroll deductions

To manage payroll deductions, it must be kept up to date with changes in the law and HMRC regulations.

Human resources managers must work with the legal department to write contracts and agreements related to different payroll deductions.

It is important that human resources teams talk to employees about payroll deductions. Let it clear what the deductions are for and how long they will last.

The payroll equipment must configure your payroll software to handle different deductions before taxes and produce the necessary reports.

Final thoughts

As you know now, there are different types of payroll deductions before taxes in the United Kingdom, each with its own rules.

However, everyone has one thing in common: breach can result in strong sanctions. Missing the lack of pension requirements, for example, can result in fines, judicial actions and even criminal charges.

In addition to that, each employee could have a different level of payroll deductions. This could make elaborating how much tax deduct from a salary is even more complicated.

That is why the use of reliable payroll software is essential, to ensure that all employees have the correct amount of money deducted from their salary.

The management of payroll deductions correctly not only keeps its employees happy, but also provides protection against the serious consequences of not complying with relevant laws and regulations.