Key facts
- The three main statutory deductions are Income Tax, National Insurance, and student loan repayments.
- Income Tax in 2026/27 is charged at 20% (basic), 40% (higher), and 45% (additional) on earnings above the £12,570 Personal Allowance.
- Employee National Insurance (Class 1 primary) is 8% between the Primary Threshold and Upper Earnings Limit, then 2% above.
- Student loan deductions are collected at 9% above the relevant plan threshold — employers must apply the correct plan type.
- All deductions must be reported to HMRC in real time via the Full Payment Submission (FPS).
What Are Statutory Deductions?
Statutory deductions are amounts that employers are legally required to withhold from an employee’s gross pay before making payment. These deductions are collected by the employer on behalf of HMRC and paid over to the government.[1]
The main statutory deductions are:
- Income Tax — collected through the PAYE system using the employee’s tax code
- National Insurance contributions (NICs) — both employee (primary) and employer (secondary) contributions
- Student loan repayments — where HMRC has notified the employer or the employee has declared a loan
- Postgraduate loan repayments — collected in the same way as student loans
Income Tax Deductions
Income Tax is the largest deduction for most employees. The employer uses the tax code issued by HMRC to determine how much of the employee’s pay is tax-free, then applies the relevant tax rates to the remainder.[2]
| Tax Band | 2026/27 Range | Rate |
|---|---|---|
| Personal Allowance | £0 – £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The tax code controls the Personal Allowance element. A standard code of 1257L gives the full £12,570 allowance. Codes may be adjusted where the employee has benefits in kind, multiple employments, or underpayments carried forward.
Key point: Tax is calculated cumulatively throughout the year, so over- or under-deductions in earlier months are automatically corrected in later pay periods — unless the employee is on a Week 1 / Month 1 (non-cumulative) basis.
National Insurance Contributions
Both the employee and the employer pay National Insurance on earnings above their respective thresholds. The employee’s NI is deducted from their pay; the employer’s NI is an additional cost on top of the gross salary.[3]
| Threshold / Limit | 2026/27 Annual | Weekly Equivalent |
|---|---|---|
| Lower Earnings Limit (LEL) | £6,708 | £129 |
| Primary Threshold (PT) | £12,570 | £242 |
| Secondary Threshold (ST) | £5,000 | £96 |
| Upper Earnings Limit (UEL) | £50,270 | £967 |
For most employees on NI category letter A:
- Employee NI: 8% on earnings between £12,570 and £50,270, then 2% on everything above
- Employer NI: 15% on earnings above £5,000 (with no upper limit)
Employers may qualify for the Employment Allowance (up to £10,500 in 2026/27), which reduces their employer NI bill.
Student Loan & Postgraduate Loan Deductions
Employers must deduct student loan repayments when HMRC sends an SL1 start notice, or when a new employee indicates on their starter checklist that they have a student loan. Repayments are calculated at 9% of earnings above the plan threshold.[4]
| Plan Type | 2025/26 Annual Threshold | Deduction Rate |
|---|---|---|
| Plan 1 (pre-September 2012) | £26,900 | 9% |
| Plan 2 (post-September 2012, England/Wales) | £29,385 | 9% |
| Plan 4 (Scottish) | £33,795 | 9% |
| Plan 5 (post-2023, England) | £25,000 | 9% |
| Postgraduate Loan | £21,000 | 6% |
Tip: An employee can have both a student loan and a postgraduate loan at the same time. Both deductions should be calculated independently and both reported on the FPS. An employee can also be on two student loan plans simultaneously (for example, Plan 1 and Plan 4).
Order of Deductions
When processing payroll, deductions should be applied in the correct order:
- Gross pay is established (basic pay plus any overtime, bonuses, commission)
- Pension contributions under a net pay arrangement are deducted (if applicable)
- Income Tax is calculated using the tax code on the resulting figure
- National Insurance is calculated on gross pay (before pension under net pay; pension contributions do not reduce NI liability)
- Student loan / postgraduate loan deductions are calculated on gross pay
- Other statutory deductions (attachment of earnings orders) are applied
- Voluntary deductions (payroll giving, union subscriptions) are taken if agreed
Reporting Deductions to HMRC
All statutory deductions must be reported on the Full Payment Submission (FPS) each time employees are paid. The FPS includes year-to-date figures for tax, NI, and student loan deductions for every employee. HMRC uses this data to maintain accurate records and identify discrepancies.[1]
Frequently Asked Questions
What happens if an employer fails to make statutory deductions?
The employer remains liable for the tax and NI that should have been deducted. HMRC can issue a regulation 80 determination to recover the Income Tax and a Section 8 notice for NI. Penalties and interest may also apply. It is the employer’s legal responsibility to operate PAYE correctly.
Can an employee ask their employer not to deduct tax?
No. Employers must follow the tax code issued by HMRC. If an employee believes their tax code is wrong, they should contact HMRC directly to have it corrected. The employer cannot override or ignore the code.
How do I know which student loan plan to deduct?
HMRC sends an SL1 or SL2 start notice telling you which plan type applies. If a new starter indicates on their starter checklist that they have a student loan, use Plan 1 unless they specify otherwise. The main plans are Plan 1 (pre-2012), Plan 2 (post-2012), Plan 4 (Scottish), Plan 5 (post-2023), and Postgraduate Loan.
Are statutory deductions taken before or after pension contributions?
It depends on the pension scheme. Under a net pay scheme, pension contributions are deducted before tax (but after NI). Under relief at source, contributions are taken after tax and the pension provider claims back basic rate relief. Student loan deductions are always calculated on gross pay before pension deductions.
Further Reading
- How PAYE Works (Employer Obligations) — the full picture of employer payroll duties
- How Tax Codes Work — understanding the codes that drive Income Tax deductions
- Attachment of Earnings Orders — court-ordered deductions from pay
- Pension Auto-Enrolment Deductions — workplace pension contributions explained
- PAYE Thresholds & Rates 2026/27 — complete rate tables for the current tax year
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Sources
- Running payroll: Deductions — GOV.UK
- Income Tax rates and Personal Allowances — GOV.UK
- National Insurance rates and categories — GOV.UK
- Repaying your student loan — GOV.UK