Unlawful Deduction of Wages

What is an Unlawful Deduction of Wages?

An unlawful deduction of wages occurs when your employer takes money from your pay, or pays you less than the amount properly due, without lawful authority to do so.

Under section 13 of the Employment Rights Act 1996 (ERA 1996), your employer can only make a deduction from your wages in three circumstances:

1. The deduction is required or authorised by law, for example income tax, National Insurance contributions, or student loan repayments.
2. The deduction is authorised by a provision in your employment contract, and your employer gave you a written copy of that provision before making the deduction.
3. You gave your prior written consent to the deduction being made.

Any deduction that falls outside these three categories is unlawful. It’s also important to understand that being paid less than you’re owed counts as a deduction too. Under section 13(3) ERA 1996, if the total amount of wages paid to you on any occasion is less than the total properly payable, the shortfall is treated as a deduction.

So if your employer simply pays you less than your contractual entitlement, that’s an unlawful deduction, even if they haven’t physically “taken” anything from your pay.

Who Can Bring a Claim?

Employees and Workers

The unlawful deduction of wages protections apply to both employees and workers. This is one of the broadest protections in employment law. If the person who pays your wages makes an unlawful deduction, you can rely on the ERA 1996 regardless of whether you’re technically classified as an employee or a worker.

You don’t need any minimum length of service to bring a claim. This is a day one right. You could start a new job on Monday, receive a short payslip on Friday, and bring a claim the following week.

A significant advantage of unlawful deduction of wages claims is that you can bring them while still employed. You don’t need to resign or be dismissed first. This makes the claim a practical tool if you simply want a third party to decide whether you’re owed money, without putting your job at risk.

Self-Employed and Agency Workers

If you’re genuinely self-employed, you cannot bring an unlawful deduction of wages claim at the employment tribunal. You would need to pursue a debt recovery claim in the County Court instead. You can find information about making a money claim online at GOV.UK.

Agency workers may be covered if they qualify as “workers” under the ERA 1996. This depends on the specific arrangements. If you’re unsure about your employment status, it’s worth seeking legal advice, as this area can be complex.

What Counts as ‘Wages’?

The Legal Definition

Section 27 of the ERA 1996 defines wages broadly as “any sums payable to the worker in connection with his employment”. This covers a wide range of payments, including:

• Your normal salary or hourly wages
• Bonuses and commission (including post-employment commission)
• Holiday pay
• Statutory sick pay (SSP)
• Statutory maternity pay (SMP), statutory paternity pay (SPP), statutory adoption pay (SAP), statutory shared parental pay (ShPP), statutory parental bereavement pay, and statutory neonatal care pay
• Payments for time off to which you’re entitled, for example time off for antenatal appointments
• Overtime payments

If your employer deducts, withholds or underpays any of these, you can ask the employment tribunal to order repayment.

What’s Not Covered

Certain types of payments fall outside the definition of wages. These include:

• Expenses: Not paid in connection with your employment itself. If your employer refuses to reimburse expenses, consider a breach of contract claim.
• Redundancy payments: Not classified as wages, but if unpaid, you can claim under section 164 of the ERA 1996.
• Payments relating to share schemes: Typically pursued as a breach of contract claim.
• Payment in lieu of notice (PILON): Not wages because they’re not payments contractually due for the provision of service during employment. A claim for unpaid PILON should be brought as a breach of contract or wrongful dismissal claim.
• Pension contributions and loan repayments

If your employer withholds any of these payments, you may still have a legal claim; it just won’t be an unlawful deduction of wages claim. Breach of contract claims can be brought in the employment tribunal (if your employment has ended, subject to a £25,000 cap) or in the County Court (while employed or after, with a six-year limitation period).

One exception: if your wages during a period of garden leave have been docked, you can pursue an unlawful deduction of wages claim, because garden leave pay is contractual pay for the duration of your employment.

Bonuses: Contractual vs Discretionary

Whether you can claim an unpaid bonus as an unlawful deduction depends on the type of bonus.

If your bonus is contractual, meaning there’s a clear formula, target or entitlement set out in your contract, it counts as wages. You can bring an unlawful deduction claim to recover it. The key is that the amount must be ascertainable and quantifiable.

If the bonus is purely discretionary, where your employer has absolute discretion over whether to pay it and how much, an unlawful deduction claim is unlikely to succeed. In those circumstances, a breach of contract claim may be more appropriate.

“The distinction between contractual and discretionary bonuses catches many people out. If your contract says you’ll receive a bonus based on specific targets and you’ve hit those targets, that bonus is part of your wages. But if the wording says ‘at the company’s absolute discretion’, recovering it through an unlawful deduction claim becomes very difficult. Always check the exact wording of your contract or bonus scheme documents.”

Tom Street Principal Solicitor, Tom Street & Co.

Tips, Gratuities and Tronc

The law on tips changed significantly on 1 October 2024, when the Employment (Allocation of Tips) Act 2023 came into force.

Tips, gratuities and service charges are now specifically included in the definition of wages under a new section 27C inserted into the ERA 1996. The key changes are:

• 100% of qualifying tips must go to workers without any deductions by the employer
• Employers cannot use contractual clauses to authorise deductions from tips. Under section 13(8) ERA 1996, the usual contractual authorisation defence does not apply to tips
• Tips cannot count towards National Minimum Wage obligations
• Employers must have a written tipping policy and keep records for three years
• Workers can bring tribunal claims for non-compliance, with compensation of up to £5,000 per worker

If you work in hospitality, retail or any sector where tips form part of your income, these protections are substantial. Your employer cannot keep any portion of your tips, and they cannot deduct administration fees or processing costs from them either.

A Statutory Code of Practice published by the government provides guidance on how tips should be distributed fairly and transparently.

When is a Deduction Lawful?

There are a number of specific situations where your employer can lawfully deduct from your wages. Understanding these will help you assess whether you have a valid claim.

Statutory deductions: Your employer is required by law to deduct income tax (PAYE), National Insurance contributions, student loan repayments and child support payments ordered by the Child Maintenance Service.

Contractual deductions: If your employment contract contains a clause authorising a specific type of deduction, and your employer gave you a written copy of that clause before making the deduction, it will be lawful. Common examples include salary sacrifice arrangements for pensions or childcare vouchers.

Prior written consent: If you agreed in writing to a deduction before it was made, it’s lawful. The consent must relate to the specific deduction or type of deduction, and it must have been given before the event that triggered the deduction.

Overpayment of wages or expenses: If your employer accidentally overpaid you, they can deduct the overpayment. This is an exception to the usual rules under section 14 of the ERA 1996.

Payments to public authorities: Deductions made pursuant to court orders, attachment of earnings orders, or County Court Judgments fall outside the scope of unlawful deduction protection.

Industrial action: If you take part in a strike or other industrial action, your employer can withhold pay for the period you were not working.

Retail workers: If you work in the retail sector, your employer can make deductions for cash shortages or stock deficiencies, but only up to 10% of your gross pay for any single pay period. If you leave employment, they can deduct the full outstanding amount from your final pay.

Time Limits for Making a Claim

Current Time Limits

You must bring your claim for unlawful deduction of wages to the employment tribunal within three months minus one day from the date of the deduction. If there has been a series of deductions, the three-month period runs from the date of the last deduction in the series.

Before you can submit a claim, you must contact Acas (the Advisory, Conciliation and Arbitration Service) to start early conciliation. This is a mandatory step. The early conciliation period can last up to six weeks (or longer if both parties agree), and the time spent in early conciliation effectively pauses your time limit, giving you additional time to file your claim.

The Two-Year Backstop: Under Challenge

Currently, section 23(4A) of the ERA 1996 imposes a two-year backstop on unlawful deduction claims. This means that even if you bring your claim in time, the tribunal can only consider deductions made within the two years before your claim was presented.

This backstop was introduced in 2014 by the Deduction from Wages (Limitation) Regulations, primarily to limit employers’ exposure to large backdated holiday pay claims.

However, in January 2025, an employment tribunal in Afshar and others v Addison Lee Ltd held that this two-year backstop is unlawful. The tribunal found that the regulations introducing the backstop were ultra vires, meaning the government exceeded its legal authority in creating them. The regulations were made under section 2(2) of the European Communities Act 1972, which the tribunal ruled was not broad enough to limit primary domestic employment rights in this way.

This decision is currently under appeal, with the government intervening to argue in favour of keeping the backstop. Employment tribunal decisions are not binding on other tribunals, so the two-year backstop remains technically in force for now. If you believe you have deductions going back more than two years, seek legal advice about how this developing area of law may affect your claim.

Coming Change: Six-Month Time Limits

The Employment Rights Act 2025, which received Royal Assent on 18 December 2025, will extend time limits for most employment tribunal claims from three months to six months. This change is expected to take effect in October 2026.

Once in force, you will have six months minus one day to bring an unlawful deduction of wages claim, giving you significantly more time to seek advice and prepare your case. Until then, the current three-month time limit applies, so don’t delay.

How to Make a Claim

If you believe your employer has made an unlawful deduction from your wages, here are the steps you should follow.

Step 1: Gather your evidence. Collect your payslips, employment contract, any written communications about the deduction, and bank statements showing what you were paid versus what you should have been paid. The more documentation you have, the stronger your position.

Step 2: Raise the issue with your employer. In many cases, a deduction may be a genuine mistake that can be resolved informally. If informal approaches don’t work, consider raising a formal grievance. While not legally required before making a tribunal claim, raising a grievance gives your employer a chance to put things right and demonstrates that you tried to resolve the issue.

Step 3: Contact Acas for early conciliation. This is mandatory. You must notify Acas before submitting a tribunal claim. Acas will try to help you and your employer reach a settlement without going to tribunal. If conciliation is unsuccessful, Acas will issue you with an early conciliation certificate, which you’ll need to submit your claim.

Step 4: Submit your claim to the employment tribunal. Complete an ET1 form and submit it to the employment tribunal. You can do this online. Make sure you submit it within the time limit (three months minus one day from the deduction, or the last in a series of deductions, adjusted for early conciliation).

“The single most important thing you can do is keep a clear record of every deduction. Save your payslips, screenshot your bank statements, and keep copies of any emails where you’ve queried the deduction with your employer. We see too many claims weakened because the employee can’t clearly evidence the gap between what they were paid and what they should have been paid.”

Tom Street Principal Solicitor, Tom Street & Co.

What if Your Employer Pays You Late?

Late payment of wages technically counts as an unlawful deduction. Under section 13(3) of the ERA 1996, wages are properly payable “on that occasion”, meaning as soon as the wages are overdue, you can bring a claim.

However, there’s a practical limitation. If your employer pays the overdue wages before the matter reaches the employment tribunal, the tribunal cannot order payment of sums already paid. This means that by the time a hearing takes place, a late payment claim may have become academic.

That said, the tribunal can order your employer to pay consequential losses caused by the late payment. If you incurred bank charges, overdraft fees, or other financial losses because your wages arrived late, you may be able to recover these.

If your employer persistently pays your wages late, this could amount to a fundamental breach of your employment contract. In those circumstances, you might want to consider whether you have grounds for a constructive dismissal claim, though this would require you to resign and you would generally need at least two years’ continuous service (reducing to six months from 1 January 2027 under the ERA 2025).

What Compensation Can You Expect?

If the employment tribunal finds that an unlawful deduction has been made, it will issue a declaration in your favour and order your employer to repay the amount unlawfully deducted.

Crucially, there is no upper limit on the amount the tribunal can award in unlawful deduction of wages claims. This makes it a particularly useful claim type for high-value disputes, such as large unpaid bonuses or commission. The £25,000 cap that applies to breach of contract claims in the tribunal does not apply here.

The tribunal may also partially uphold your claim. For example, if part of the deduction was lawful and part was not, the tribunal will order repayment only of the unlawful portion.

If your employer has already paid some of the money owed by the time the case reaches the tribunal, they will be ordered to pay only the outstanding balance.

The tribunal will express the amount of the unlawful deduction in gross figures. Your employer will then pay the net amount after deducting the appropriate tax and National Insurance contributions.

In some cases, the tribunal may also award compensation for consequential financial losses, such as bank charges incurred as a direct result of the deduction.

Unlawful Deduction of Wages vs Breach of Contract

If you haven’t been paid money you’re owed, you might have a choice between an unlawful deduction of wages claim and a breach of contract claim. Understanding the differences will help you choose the right approach.

In practice, you will often use an unlawful deduction of wages claim where the payment you’re owed falls within the definition of “wages” under the ERA 1996, because it offers no cap on compensation and you can claim while still employed. Breach of contract is the better route for payments that fall outside the definition of wages, such as expenses, PILON, or where you need the longer six-year limitation period available in the County Court.

Sometimes it makes sense to bring both types of claim together. A solicitor can advise you on the best approach for your specific circumstances.

How We Can Help

We’ve helped many employees and workers recover wages that were unlawfully deducted by their employers. Our team regularly represents claimants at employment tribunals across England and Wales.

For claims exceeding £3,000: We may be able to represent you on a no win no fee basis. This means you won’t pay legal fees unless your claim is successful.

For lower value claims: We can offer advice on the strength of your case and help with your paperwork so you can pursue your claim independently at the employment tribunal.

For a free preliminary assessment of your potential claim, call us on 020 3835 3940 or submit your details online via our quick assessment form.