Payroll deduction or paying in yourself

A credit union payroll deduction scheme takes money straight out of your wages on pay day and puts it into your credit union account, before it reaches your bank. You do not have to remember to move it, and you cannot spend it by accident on the way. If your employer is not signed up, you can still pay in by Direct Debit, standing order, cash at a branch or collection point, or by having benefits paid in directly.

The choice matters most for two things: whether the money actually arrives every month, and what happens if your circumstances change. Payroll deduction stops the moment you leave that job. A Direct Debit or standing order carries on regardless of who employs you. Both routes lead to the same account, and the same protections apply either way.

This page sets out how each method works, what it costs, how to change the amount, and what happens if you change jobs or fall behind on a loan.

How payroll deduction works with a credit union

A payroll deduction scheme is an arrangement between a credit union and an employer. The employer adds a line to its payroll run, takes the agreed amount from your pay, and sends it to the credit union. The money is deducted from your wages every pay day and goes straight to your credit union account¹. One credit union describes it as saving regularly, direct from your pay and before it reaches your bank account⁶.

The mechanics are simple from the member's side. If your organisation supports the scheme, you join the credit union and complete a payroll deduction mandate, and the credit union does the rest⁶. If you are already a member and your employer is already a partner, you complete a payroll deduction amendment and select how much you want to save¹. Some schemes let the deduction be split between savings and loan repayments at your request⁷.

Not every employer offers it. One credit union lists the organisations whose employees can use its scheme, which in its case are two county councils and an agricultural cooperative⁶. Another offers payroll deduction through select employers only⁸. Where it is available, it is usually one of several ways to pay in rather than the only one.

Other ways to pay in: Direct Debit, standing order, cash and benefits

Payroll deduction is one route among several, and the alternatives matter if your employer is not a partner or you change jobs. Members can contribute by Direct Debit, payroll deduction, standing order or BACS transfer⁹. More broadly, members can pay in directly by payroll deduction or through benefit direct accounts, through retail payment networks such as PayPoint and PayZone, by standing order or Direct Debit, or in cash at local offices and collection points¹⁰.

Individual credit unions vary. One accepts standing order, debit card, bank transfer, direct benefit payment, cash and cheques at branches, and payroll deductions with local businesses¹¹. Another accepts standing order, payroll deduction, cash, cheque, card payment, or payment at one of its collection points¹². A third lists payroll deduction, Direct Debit or lump sum bank transfers¹³.

Withdrawals work differently from payments. You can take money out by cashing a cheque at a local Post Office, in cash from a local credit union office, by payment directly into a bank account, or by debit card at a cash machine if the credit union operates a current account¹⁵. If you claim benefits and need cash, the Payment Exception Service lets you get vouchers you can swap for cash at a Post Office or PayPoint outlet, loaded onto a payment card or sent by email or text message¹⁶.

Repaying a credit union loan from your wages

Payroll deduction is not only for savings. Repayments on a credit union loan can often be made through payroll deduction or Direct Debit, aligning with your income schedule¹⁷. One credit union's payroll deduction scheme loan takes repayments deducted straight from your salary¹⁸. Another asks borrowers to agree to repay the loan plus interest in instalments by either payroll deduction or Direct Debit¹⁹.

Some schemes build saving into the repayment. Under one payroll deduction scheme loan, repayments are split between your loan and your savings as part of the agreement¹⁸. That is the same idea as Save As You Borrow, where a member builds a savings balance while clearing a loan.

You need to be a member of a credit union to get a loan from them, and some will ask you to build up savings first²⁰. If you are a member, you can usually borrow at least two or three times the amount you have in savings, depending on the credit union's loan policy²¹. Credit unions always consider affordability when assessing loan applications⁴.

Joining through your employer: the common bond at work

You cannot simply pick a credit union and join. Membership is based on a common bond, and anyone can become a member provided they share that bond with other members¹⁰. A common bond can be working for a particular employer or in a particular industry, or simply living or working in a specified geographical area¹⁰. Credit unions work by all members sharing a common bond, such as living, working, studying or volunteering in a certain area, working in the same industry or for certain employers, or belonging to the same trade union²².

An employer-based credit union is one form of this. One credit union's terms require you to work for one of the employers listed in its common bond, or to be a close relative of an existing member employed by one of those employers and to live at the same address as that relative²³. Eligibility is widening: students, local workers and relatives of existing members are being brought in, reflecting the way people live and work²⁴.

Family membership follows from the member, not the employer. As long as one member of a family meets the common bond requirements and has joined the credit union, other family members living at the same address can usually join¹⁵. Anyone in the house of a person with a common bond can usually join²⁵. Where a family member works for an organisation signed up as a payroll partner, they can use deductions from their pay; otherwise the family member uses a Direct Debit repayment and saving method²⁶.

If you are not sure which credit union covers your employer, you can find one you can join, or read more about the common bond and joining through your employer, trade or profession.

What happens if you leave your job or miss payments

Leaving a job does not end your membership. Your savings and your membership stay with you, they are not tied to your job, and if you leave, your payroll deduction simply stops¹⁴. You would then need to switch to another payment method, such as a Direct Debit or standing order, to keep saving or repaying.

Missing payments is a different matter. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan²¹. That is a real risk of holding savings and a loan with the same credit union: the savings are not ring-fenced from the debt.

Loan agreements can be firmer still. One credit union's terms state that on default, cessation of employment, a Trust Deed or bankruptcy, the entire balance outstanding will immediately become due and payable together with all the interest that would have been payable if the loan agreement had run its full term¹⁹. In other words, leaving your job can trigger the full remaining interest, not just the capital.

Outside credit unions, the rules on taking money from wages are tighter. A creditor can only take money from your wages if you have a court judgment and missed a payment you were ordered to make²⁷. If you have an attachment of earnings order, you can apply to get the deduction amount changed if you cannot afford it²⁸. In Scotland, a debtor contribution order works differently: if you miss two payments, your trustee could instruct your employer to make deductions from your wages²⁹.

If you are behind on a credit union loan, falling behind sets out the options, and free debt advice is available from StepChange and National Debtline.

What it costs, and how to change the amount

Payroll deduction itself is often free to the member, but not always. One credit union charges members joining via payroll deduction an annual account fee of £5, deducted from the first payment². The same scheme costs the employer nothing: the credit union provides the service to the business without charge². Fees vary between credit unions, so the figure that applies to you is the one in your own credit union's terms.

Changing the amount is straightforward. A new payroll deduction mandate replaces the existing amount, so the figure entered is the total to be saved rather than the increase or decrease⁶. One credit union states that payroll saving can be increased, reduced, paused or stopped at any time, with no minimum term and no penalty for changing your mind¹⁴.

Joining usually involves a small cost. You normally become a member by paying a small fee, for example £2, or by saving a certain amount such as £10²². You will usually need to provide two recent documents to prove your identity and address, such as a passport, driving licence, student or work ID card, bus pass, birth certificate, bank statement or energy bill²². To become a member, you need to visit or call your chosen credit union to confirm what information you need¹⁰.

Your savings are FSCS protected and complaints go to the Ombudsman

Credit unions are not-for-profit community lenders providing affordable loans and savings⁴. Loans and savings are protected by the Financial Services Compensation Scheme⁴. The scheme protects you if your bank, building society or credit union runs into financial difficulty³⁰. That protection covers your savings balance, not just the fact that you are a member.

Protection has limits and exclusions. Credit insurance is not eligible for FSCS protection³¹. Where the scheme does pay insurance claims, the rates differ by type: employers' liability claims are paid at 100 per cent, and property claims at 90 per cent³². Those figures relate to insurance, not to deposits, but they show that not every product sits inside the same level of cover.

If something goes wrong with the credit union's service, you can complain. Under the Consumer Credit Act 2006 there are rights to complain to the Financial Ombudsman Service about how your lender handled your case³³. The ombudsman also considers complaints about unaffordable lending³⁴. Most of the loans credit unions provide are specifically exempt from the Financial Conduct Authority's Consumer Credit sourcebook, and the assessment standards for those loans will typically be lower than those imposed on lenders and loans covered by it³⁵. That exemption does not remove your right to complain.

Free, impartial help is available if you are struggling. StepChange offers debt advice and emergency funding guidance, and National Debtline publishes guides on saving, debt consolidation and what creditors can and cannot do. MoneyHelper covers credit union current accounts and choosing an account for benefit payments.