Every time you run payroll, the results need to be recorded in the company’s accounting system through a payroll journal entry. This is a journal entry that captures gross pay, employee deductions, employer costs and the resulting liabilities – all in one go.
Why Payroll Journals Matter
Payroll is typically one of the largest expenses for any business. Without proper journal entries:
- The profit and loss account will not reflect the true cost of employment
- Liabilities owed to HMRC, pension providers and employees will not appear on the balance sheet
- Bank reconciliations will not tie up when payments are made
- Year-end accounts will be inaccurate
The Components of a Payroll Journal
A standard UK payroll journal captures these elements:
| Component | Nature | Debit or Credit |
|---|---|---|
| Gross salary | Expense | Debit |
| Employer NIC | Expense | Debit |
| Employer pension contribution | Expense | Debit |
| PAYE income tax | Liability | Credit |
| Employee NIC | Liability | Credit |
| Employee pension contribution | Liability | Credit |
| Student loan deduction | Liability | Credit |
| Net pay | Liability | Credit |
The debits represent the cost to the employer. The credits represent amounts owed to HMRC, pension providers or the employee.
Basic Payroll Journal Example
An employee earns a gross salary of £3,000 per month. The following figures are an illustrative payroll calculation using illustrative tax and NIC rates and thresholds, monthly pay, a Plan 2 student loan and a 5% employee pension deduction from gross pay. Actual PAYE can vary with the employee’s tax code, cumulative pay and pension scheme rules:
| Item | Amount |
|---|---|
| Gross salary | £3,000.00 |
| PAYE income tax | £390.50 |
| Employee NIC | £156.16 |
| Employee pension (5%) | £150.00 |
| Student loan (Plan 2) | £49.00 |
| Net pay | £2,254.34 |
| Employer NIC | £387.45 |
| Employer pension (3%) | £90.00 |
The journal entry for this payroll would be:
| Account | Debit | Credit |
|---|---|---|
| Salary expense | £3,000.00 | |
| Employer NIC expense | £387.45 | |
| Employer pension expense | £90.00 | |
| PAYE liability (HMRC) | £390.50 | |
| Employee NIC liability (HMRC) | £156.16 | |
| Employer NIC liability (HMRC) | £387.45 | |
| Pension liability | £240.00 | |
| Student loan liability (HMRC) | £49.00 | |
| Net salary payable | £2,254.34 | |
| Total | £3,477.45 | £3,477.45 |
The debits and credits balance. The total employer cost is £3,477.45 (gross salary plus employer NIC plus employer pension).
Posting the Payment Journals
When the company actually pays the liabilities, separate journals clear them:
Paying Net Salary to the Employee
| Account | Debit | Credit |
|---|---|---|
| Net salary payable | £2,254.34 | |
| Bank | £2,254.34 |
Paying HMRC (PAYE, NIC, Student Loan)
| Account | Debit | Credit |
|---|---|---|
| PAYE liability | £390.50 | |
| Employee NIC liability | £156.16 | |
| Employer NIC liability | £387.45 | |
| Student loan liability | £49.00 | |
| Bank | £983.11 |
HMRC payment is due by the 22nd of the following month (or the 19th if paying by cheque).
Paying the Pension Provider
| Account | Debit | Credit |
|---|---|---|
| Pension liability | £240.00 | |
| Bank | £240.00 |
Employer NIC: a Separate Expense
A common mistake is to overlook employer NIC as an additional cost. It is not deducted from the employee’s pay – it is an extra expense the company bears on top of gross salary.
Employer NIC is charged at a single rate on earnings above the Secondary Threshold, which has weekly, monthly and annual equivalents. HM Treasury sets the rate and threshold for each tax year, and payroll software applies them.
This means the true cost of employing someone earning £36,000 per year is significantly more than £36,000 once employer NIC and pension contributions are added.
Employment Allowance
Employers eligible for the Employment Allowance can offset an annual amount against their employer Class 1 NIC liability until the allowance is used up. In the accounts, a month in which £2,000 of employer NIC is covered by the allowance is typically recorded as:
| Account | Debit | Credit |
|---|---|---|
| Employer NIC liability | £2,000 | |
| Employment Allowance income | £2,000 |
This reduces the amount payable to HMRC. The allowance is claimed through the RTI system on the Employer Payment Summary each tax year.
Payroll Journals for Multiple Employees
In practice, payroll journals are posted as a summary for all employees combined, not individually. The payroll software produces a report showing the totals for each component, and one journal captures the lot.
| Account | Debit | Credit |
|---|---|---|
| Salary expense – Department A | £12,000 | |
| Salary expense – Department B | £8,000 | |
| Employer NIC expense | £2,000 | |
| Employer pension expense | £600 | |
| PAYE liability | £3,800 | |
| Employee NIC liability | £1,600 | |
| Employer NIC liability | £2,000 | |
| Pension liability | £1,200 | |
| Student loan liability | £280 | |
| Net salary payable | £13,720 |
Splitting salary expense by department or cost centre gives management better visibility of where payroll costs fall.
Nominal Codes for Payroll
Most UK accounting systems use standard nominal codes for payroll accounts:
| Nominal Code | Account Name |
|---|---|
| 7000 | Gross wages and salaries |
| 7006 | Employer NIC |
| 7007 | Employer pension contributions |
| 2210 | PAYE and NIC liability |
| 2220 | Pension liability |
| 2230 | Net wages payable |
The exact codes vary by software, but the principle is the same: payroll expenses hit the profit and loss, and the corresponding liabilities sit on the balance sheet until paid.
Statutory Pay in Payroll Journals
When employees receive Statutory Maternity Pay, Statutory Sick Pay or other statutory payments, these are posted through the same payroll journal. The key difference is that some statutory payments can be recovered from HMRC, which creates a separate accounting entry.
For example, recovering £190 of SMP:
| Account | Debit | Credit |
|---|---|---|
| HMRC recovery (debtor) | £190.00 | |
| Salary expense | £190.00 |
The recovery reduces the net salary expense. The debtor is cleared when the employer offsets the amount against the monthly PAYE payment to HMRC.
Month-End Payroll Accrual
If the payroll period does not align with the accounting period – for example, employees are paid on the 25th but the accounting month ends on the 30th – an accrual is needed to record the cost of the days between the pay date and month end.
| Account | Debit | Credit |
|---|---|---|
| Salary accrual expense | £500 | |
| Salary accrual liability | £500 |
This accrual is reversed at the start of the following month and replaced by the actual payroll journal.
Common Mistakes
- Forgetting employer NIC – this is an employer cost, not a deduction, and must be journalled separately
- Posting net pay as the expense – the expense is always gross pay plus employer costs
- Not clearing liabilities – PAYE and pension liabilities must be cleared when payments are made to HMRC and the pension provider
- Mixing pay periods – each payroll run should be posted as a distinct journal with a clear date reference
- Not reconciling – compare the payroll reports to the general ledger monthly to catch errors early
The payslip is a useful cross-check: the net pay on the payslip should match the net salary payable posted in the journal.