The moment a payroll is processed, the business owes money to three or more parties: employees for their net pay, HMRC for tax and National Insurance, and the pension provider for contributions. These are current liabilities, they fall due within weeks, and late payment carries penalties. The expense side of the same journal is covered in wages and salaries; this page follows the money owed until it is paid.
Liability accounts to set up
- Net wages control – net pay owed to employees, cleared when the pay run leaves the bank
- PAYE and NIC payable – income tax, employee and employer NIC and student loan repayments, all paid to HMRC together
- Pension contributions payable – employee and employer contributions due to the pension scheme
- Other deductions payable – attachment of earnings orders, union subscriptions, payroll giving, cycle-to-work repayments if collected for a third party
- CIS deductions payable – for construction contractors, deductions from subcontractors that are paid with PAYE
Keep each payee separate. A single “Payroll creditors” account that mixes HMRC and the pension scheme makes it impossible to see which one has not been paid. Some businesses add a payroll clearing account as a staging point for the journal; it should be nil after every run.
One month’s PAYE, from pay day to payment
PAYE runs on tax months, which run from the 6th of one month to the 5th of the next. Take a company that pays its staff on the 28th:
- On or before pay day, the Full Payment Submission (FPS) is sent to HMRC with each employee’s pay and deductions.
- The payroll journal credits the liability accounts with the same figures.
- Net pay goes out by bank transfer; the net wages control account returns to nil.
- By the 19th of the following month, an Employer Payment Summary (EPS) is sent if the company is claiming anything that reduces the bill, such as Employment Allowance or recovered statutory pay, or has no employees paid in the month.
- By the 22nd of the following month, the amount due is paid to HMRC electronically. A cheque must reach HMRC by the 19th.
HMRC’s guide to paying employers’ PAYE sets out the deadlines. Employers whose average monthly bill is below HMRC’s limit can ask to pay quarterly instead, with each payment due by the 22nd after the quarter ends.
Reconciling the liability to what HMRC expects
The PAYE and NIC payable balance just before payment should equal what HMRC expects, which is built from your submissions.
Example for one tax month:
| Item | Amount |
|---|---|
| Income tax per FPS | £3,240 |
| Employee NIC per FPS | £1,180 |
| Employer NIC per FPS | £1,690 |
| Student loan repayments per FPS | £120 |
| Total from FPS | £6,230 |
| Less statutory maternity pay recovered, per EPS | (£540) |
| Amount due to HMRC | £5,690 |
If the ledger shows £6,230, the EPS recovery has not been posted. The entry is:
| Account | Debit | Credit |
|---|---|---|
| PAYE and NIC payable | £540 | |
| Statutory pay recovered (against wages) | £540 |
After the £5,690 payment the account should be nil. Compare the result with the balance shown in your HMRC online account, which is the authoritative view of what HMRC thinks you owe. A detailed method is in PAYE payment reconciliation.
Pensions and other deductions
Pension contributions deducted from pay must reach the scheme within the deadlines set by The Pensions Regulator, and the employer’s contributions travel with them. The pension provider’s contribution schedule should agree to the pension contributions payable balance; differences usually come from employees who opted out after the file was sent, or contributions on a bonus run that was not uploaded. Our guide to pension contributions explains the deadlines and how contributions are processed.
Student loan repayments are collected through PAYE and are part of the HMRC payment, not a separate creditor. Court orders and child maintenance deductions are paid to the court or agency named in the order, so they belong in other deductions payable, one line per order if there are several.
When the balance will not clear
| Symptom | Likely cause |
|---|---|
| PAYE balance grows month by month | Payments posted to an expense account instead of the liability |
| Small residual after every payment | EPS claims or Employment Allowance never journalled |
| Net wages control not nil | A payment was missed, paid twice, or an employee was paid outside payroll |
| Debit balance on PAYE | An overpayment to HMRC, or a duplicate payment, which can be offset or reclaimed |
| HMRC account differs from ledger | An FPS was corrected after the journal was posted |
Late payment or a missed FPS triggers penalties and interest, and corrected submissions need a matching ledger correction. FPS submission checklist explains how the submission side is fixed.
Where the liabilities sit in the accounts
In the balance sheet these balances form part of creditors: amounts falling due within one year, under the heading for other creditors including taxation and social security; the notes usually show the PAYE, NIC and CIS part separately from net pay and pensions owing. At year end, unpaid amounts for the last tax month are normal; amounts older than that are a sign something needs fixing before the accounts are signed.