Payroll and Associated Matters

Wages and salaries are very often grouped together and it is not easy to fix the distinctions between them. It is hard to believe that snobbery does not sometimes playa part. It is sometimes said that wages are paid weekly, whereas salaries are paid monthly, and it is sometimes
said that wages are paid in cash, whereas salaries are paid by cheque or bank transfer.
Some contend that salaries are paid for office or professional work. Be that as it may, the distinctions in Britain are fast disappearing, partly because fewer 
workers are paid in cash and more workers are paid monthly rather than weekly.

Whether it is a wage or a salary, a worker is very unlikely to receive the full amount of it. In the words of a nineteenth-century judge, ‘the state will insert its shovel into his or her stores and extract what many consider to be a distressingly large sum’.
Of course you may not agree with this robust viewpoint and many do not. It is a legal requirement that the process be properly managed and the necessary entries made into the bookkeeping system.

Until almost the middle of the last century taxpayers paid their income tax directly to the Inland Revenue and employers were not involved. In practice most of them paid no income tax at all because the thresholds were set so that a man or woman with children and earning the average wage had nothing to pay. This, needless to say, is no longer the case. Almost all employees do pay income tax, even those receiving a wide range of state benefits, and it is deducted at source by employers via the PAVE system, which is compulsory. National insurance is also collected in this way. National insurance is in theory a compulsory insurance scheme whereby workers are insured for certain eventualities and pay for their state pensions. In fact it is a misnomer because there is no separate fund and the state pays benefits out of current income.
Let us hope that future governments and voters are willing to pay our pensions and benefits when we need them.

The detailed operation of payroll systems is beyond the scope of this chapter. It will probably be complicated and the complexity seems to increase year by year. Most businesses use computerised systems for their payroll, either their own or that of a bureau.
The needs of businesses differ and all the necessary information must be made available.
Income may be complicated as well as the deductions, and it is very important that the correct calculations be entered. Mistakes can lead to underpayments or over payments,  and the possibility of cheating should be kept in mind. Auditors will certainly consider this. Employees can usually be relied upon to draw attention to any underpayments, though over payments may 
not always be pointed out. Bonuses, overtime, and piecework may be amongst the different types of income.

Features of PAYE include the following:


  • HMRC will issue a tax code for each employee and the employer must use this in calculating the income tax deductions to be made each week or month. The tax codes are based on individual circumstances and are designed to deduct the correct amount of tax (including higher rate tax if applicable), so that the correct amount of tax has been deducted evenly throughout each tax year ending on 5 April, The tax code may be changed from time to time to correct mistakes, allow for underpayments or over payments or because
    of changing circumstances. 
  • Employees national insurance contributions must be deducted. These are calculated according to published rates and tables, and are not based on individual codes.
  • Employers must pay national insurance contributions too. (You may have heard of Lloyd George’s catchphrase in 1909, ‘ninepence for fourpence’. It meant that each employee would get ninepence worth of benefits by paying fourpence, and with the employer paying the rest. Interestingly Lloyd George set the payment age for the state pension at 70. Employers’ national insurance contributions are calculated according to different principles and are of course not deducted from pay.
  • Other factors may best be summarised by listing the remaining boxes on the year-end P35 form that must be submitted to HMRC.


– Statutory Sick Pay recovered

– Statutory Maternity Pay recovered 

– NIC compensation on Statutory Matemity Pay

– Statutory Patemity Pay recovered 

– NIC compensation on Statutory Patemity Pay
– Statutory Adoption Pay recovered 

– NIC compensation on Statutory Adoption Pay

– Funding received from HMRC to pay SSP/SMP/SPP/SAP


Things have moved a long way since Lloyd George’s ‘ninepence for fourpence’.

• Each month by a prescribed date (unless other arrangements are in place) the business must make a payment to HMRC. This is for the net amount due for all deductions and transactions in the prescribed period.

• After each tax year ending on 5 April each business must submit to HMRC detailed forms for each employee (with a copy to the employee), and summarizing its whole obligations and payments during the year. Any mistakes must be rectified, with a further payment if necessary.

There may be other deductions to make, including compulsory ones relating to the repayment of student loans and in respect of an attachment of earnings order issued by a county court. Other possibilities include the repayment of loans made by the business, the collection of trade union subscriptions, donations to a group charitable giving scheme and payments in connection with a staff share purchase scheme.

Now for the bookkeeping entries and, as you can imagine, there are a lot of possibilities. Features of the entries should include the following:

• Assuming that the payments are made to employees’ bank accounts via the BACS system, payment of the wages and salaries will be by a single cheque payable to the bank. The other side of the posting will be to a suspense account which we will call here ‘Wages Suspense Account’.

• The balance in Wages Suspense Account must be journalled out to the appropriate accounts. Money owing to HMRC for income tax and national insurance must be credited to appropriately named creditor accounts and so must money owing to any other person or organisation. The debit entries are to the various cost centre departmental accounts. Employers’ national insurance contributions must be incorporated
into these entries.

• When HMRC (and perhaps others) are paid, the creditor accounts must be debited and Bank Account (or perhaps Cash Account) must be credited.

All of this is illustrated by the following example. When you study it, remember that your organisation might use slightly different names for the accounts.


Stage 1

Parkplatt Ltd pays the monthly salaries by BACS payments to employees’ bank accounts. On 25 June it issues a single cheque for  £89,124.65 in respect of payment of the June salaries.
The entries are:

Debit £ Credit £
Wages Suspense Account Bank Account 89,124.65
Bank Account 89,124.65


 Stage 2

Entries are made to reflect the following:

  • The gross amount payable to employees was £124,888.18.
  • Income tax deducted was £18,296.11
  • Employees’ national insurance deducted was £14,117.42
  • Amounts deducted for the repayment of staff loans totalled £1,400.00
  • An amount of £300.00 was deducted from an employee’s pay under the authority of an attachment of earnings order issued by Bedford County Court
  • £1,650.00 was deducted under a payroll giving scheme in connection with the Royal Society for the Prevention of Cruelty to Animals (RSPCA)
  • Employers’ national insurance contributions (not reflected in the gross amount of £124,888.18) total £17,946.32

The total cost to Parkplatt Ltd (including employers’ national insurance contributions) is charged to six departments as follows:

  1. Production Department £56,672.49
  2. Finance Department £19,234.18
  3. Sales Department  £27,661.38
  4. Transport Department £6,141.63
  5. Service Department  £31,202.24
  6. Administration Department £1,922.58

The following entries must be made in the bookkeeping system, perhaps by journal, but an integrated computerized payroll system would probably do it automatically.

 Debit Credit
Wages Suspense Account PAVE Owing
Employees’ National Insurance Account
Staff Loans Account
Payments To Court Pending Account
RSPCA Account
Employer’s National Insurance Account 1,400.00
Stuff Loans Account 300.00
Payments to Court Pending Account 1,650.00
Employer’s National Insurance Account 17,946.32
Production Department Salaries Account 56,672.49
Finance Department Salaries Account 19,234.18
Sales Department Salaries Account 27,661.38
Transport Department Salaries Account  6,141.63
Service Department Salaries Account 31,202.24
Administration Department Salaries
142,834.50 142,834.50

Stage 3

On 7 July a cheque for £50,359.85 is drawn payable to HMRC. This appears to be very public spirited because tax and national insurance deducted between 7 June and 6 July must be paid to HMRC by 19 July. However, it is not really an early payment because the finance
director puts the cheque in her desk for ten days. The bookkeeping entries are:

Debit Credit
 Bank Account 50,359.85
PAVE Owing Account 18,296.11
Employees’ National Insurance Account 14,117.42
Employer’s National Insurance Account 17,946.32

Stage 4


On 25 July cheques for the attachment of earnings deduction and the RSPCA are drawn. The entries are:

Debit   £ Credit  £
 Bank Account 300.00
Payments To Court Pending Account 300.00
Bank Account 1,650.00
RSPCA Account 1,650.00

The net effect of all this activity (assuming that there were no brought forward balances) has been:

  • Six departmental salary accounts have been debited a total of £142,834.50. These accounts will eventually be debited to the profit and loss account.
  • Nothing is owing to HMRC.
  • Nothing is owing in respect of the attachment of earnings deduction or the payroll giving scheme.
  • Staff loans due to the company have been reduced by £1,400.00.


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