How to write a payroll journal

If you or your client have employees, you will be calculating how much to pay via payroll software. Here we set out what you need to do to record these costs and liabilities into your accounts.

Gathering the data you need

The first and most important step of creating a payroll journal is making sure you have all the information you need before you begin. Every payroll software has different versions of the same reports, so sometimes this can be misleading, but one way or another it will be possible to download everything you need.

In order to journal the payroll, you will need a payroll summary report, this is the main report and will have the list of employees who have been paid that month with their gross pay and all deductions for tax, student loans, NIC, pension, thus giving a total for net pay. It will also outline the amount the employer will pay for both NIC and pension.

The second vital document you will need is a P30/ tax detailing report. This will give in more detail what the company owes to HMRC for all tax and NIC for that period. This is important because you need to know where certain amounts are allocated and in addition outlines NIC contributions as well as any statutory pay (for example Statutory Sick Pay).

Finally, the pension report gives in more detail how much pension each employee is paying, and how much pension the employer is paying them. This allows you to see if there’s any rebate and could help balance the credits.

Creating the journal

Once you have these three reports you will be able to start creating the journal. To start you need to understand what must go on the debit side (cost to business) and the credit side (liabilities to be paid). To complete the journal both sides must be exactly balanced.

Starting with the debit side, the first amount to understand will be the salaries paid. On this side you will need the gross salaries of all employees. This is the total amount someone is paid before any tax deductions and can be found on the summary report.

Next, we have the employer’s national insurance contributions (NIC), this is the companies NIC only (as the employees NIC is included in their gross pay) and will be found on either the summary or P30. This is similar to the employer’s pension contributions; this amount is what the company owes to the pension provider and can be found on the pension report.

Once you have these three amounts, you can move to the credit side of the journal, remembering that both sides of the journal will need to be in balance.

Firstly, we can look at the salaries again, only this time we need the net pay minus the directors’ net pay (which will be entered as a separate line Director’s Loan Account). This is because we are allocating to the control account the amount due to the employees that will actually leave the bank. All the deductions will be detailed elsewhere on the credit side, when added together with net pay these will match the gross pay. The net pay will be found also on the payroll summary, but some payroll software provides a net pay report, this amount is the gross salary minus the deductions and the directors net pay also. Therefore, on the next line we need the directors net pay. This is their gross salary minus any deductions.

We can then start to journal what we owe to HMRC as PAYE. This will consist of all tax and NIC found on the P30 including statutory pay. This is similar to the pension owed on the credit side of the journal, which is both the employers and employees pension total added together.

Now, all that is left is Employment Allowance (EA). EA allows eligible employers to reduce their annual National Insurance liability by up to £5,000. You’ll pay less employers’ Class 1 National insurance each time you run your payroll until the £5,000 has been used, or the tax year ends (whichever is sooner).

You can only claim against your employers’ Class 1 National Insurance liability up to a maximum of £5,000 each tax year. You can still claim the allowance if your liability was less than £5,000 a year. Therefore, if eligible this will need to be shown on the journal. You will simply need to add the employers NI amount on both the debit and credit side again. The debit will reduce the liability owed to HMRC, and the credit will be to Employers NIC EA on the Profit and Loss.

Once we have all amounts on the journal, both sides need to balance, and it can be saved and copied for next month.

Here is an example of a completed journal.