Unexplained deductions from agency pay

Understanding what deductions are lawful

Not every deduction from your pay is unlawful, so the first step is to work out what the deductions actually are. If you work through an agency or umbrella company, some deductions are legitimate and some may not be.

Lawful deductions from your gross pay usually include Income Tax under PAYE, employee National Insurance contributions, workplace pension contributions, and student loan repayments where applicable. The umbrella company will also often deduct an agreed margin or fee for running its payroll. That fee is permitted only if you agreed to it, and it should not be dressed up as tax or National Insurance.

A common source of confusion is the difference between the assignment rate and your gross pay. The assignment rate the agency pays the umbrella company includes the umbrella company’s own employment costs, such as employer National Insurance, the Apprenticeship Levy and employer pension contributions. These are legally the umbrella company’s costs, but in practice they are usually funded out of the assignment rate before your gross pay is calculated. That is lawful if it was properly explained to you, but it is a frequent source of “unexplained” deductions that people do not expect. Deductions that are unlawful include things like unexplained “admin” charges you never agreed to, retained holiday pay, or amounts that reduce your pay below what you contracted for without a proper legal basis.

Your right to a clear explanation

You are entitled to an itemised payslip showing the amount of any deductions and what they are for. If you are supplied through an agency, you are also entitled to a Key Information Document. This must set out your pay rates, all deductions and fees, and how they affect your gross and net pay, so that you can compare the assignment rate with what you actually take home.

You can ask the umbrella company for a written breakdown of every deduction, and you can ask the agency for the Key Information Document if you were not given one or if the figures do not match. This is a reasonable and normal request, and their reluctance to provide a clear breakdown is itself a warning sign.

The legal position on unauthorised deductions

Under the Employment Rights Act 1996, an employer or umbrella company cannot make a deduction from your wages unless the deduction is required or authorised by legislation such as tax and National Insurance, or it is authorised by a written term of your contract that you saw before the deduction was made, or you gave your prior written agreement to it. A deduction made without one of these justifications is an unlawful deduction from wages.

Two points matter here. First, any contractual authority for a deduction must have existed in writing before the deduction was made, not agreed retrospectively. Second, if you never signed up to a particular charge and it is not required by law, deducting it is likely to be unlawful regardless of what the company calls it.

Practical next steps

1. Gather your evidence. Collect your payslips, your contract with the umbrella company or agency, any assignment schedule, the Key Information Document, and any messages about your pay rate. Work out the difference between what you expected and what you received.

2. Ask for a written breakdown. Write to the umbrella company asking them to identify and explain each deduction, and to point to the contractual term or legal provision that authorises it. Keep this in writing so you have a clear record.

3. Complain in writing. If the explanation is unsatisfactory or the deduction is not authorised, make a formal written complaint. If you are unsure whether your contract is with the agency or the umbrella company, complain to both at the same time, naming both companies and addresses, and ask for repayment of the disputed amount.

4. Escalate to the right body. You can raise concerns about an umbrella company or agency with the Employment Agency Standards Inspectorate, which regulates agencies and can investigate. If the issue is missing or incorrectly handled tax or National Insurance, you can report the arrangement to HMRC, particularly if you suspect a tax avoidance or disguised remuneration scheme. If you are simply not being paid the National Minimum Wage once genuine deductions are accounted for, you can report that to HMRC as well.

5. Consider a tribunal claim. If you are not repaid what you are owed, you can bring an unlawful deduction from wages claim in the employment tribunal. Before doing so you must notify Acas to start early conciliation, which is a free process that often resolves pay disputes without a hearing.

Time limits

Time limits are strict and are a common reason otherwise good claims fail. For an unlawful deduction from wages claim, you generally have three months less one day from the date of the deduction, or from the last in a series of deductions, to start Acas early conciliation. Early conciliation pauses the clock while it runs. Do not leave this to the last minute, because if the deadline passes the tribunal will usually have no power to hear the claim.

When there may be an innocent explanation

Before treating a deduction as wrongdoing, consider whether there is an ordinary explanation. A lower than expected net figure is very often caused by the gap between the headline assignment rate and your actual gross pay, because employer National Insurance, the Apprenticeship Levy, the umbrella’s margin and holiday pay handling all come out of the assignment rate. That structure is lawful if it was disclosed to you, even though it feels like money is disappearing. It only becomes an unlawful deduction where the charge was never agreed, is not required by law, or is being taken from your own gross or net pay rather than from the umbrella’s costs. Getting the written breakdown is what lets you tell the difference, and it is the single most useful thing you can do first.

Key facts that would sharpen the advice

The answer can change depending on a few things it would help to know: whether your contract is with the umbrella company, the agency, or both; whether you were given a Key Information Document and what rate it stated; whether the disputed deduction is an employer cost taken from the assignment rate or a charge taken from your own pay; whether you are an employee or worker of the umbrella; and the exact dates of the deductions, which drive the tribunal time limit.