Hello again. I’m looking for some assistance if you’d be so kind.
I’m a UK limited company with a single employee - myself.
As is usual, I pay myself a small monthly salary with a larger annual dividend.
Whilst I have a rough idea of my employers PAYE tax and National Insurance liabilities, I’m never sure of the exact figure until my accountant confirms the number at year end. At this point, I pay the tax man.
I create monthly pay slips made up of salary and pension contributions but no deductions for PAYE or National Insurance tax.
When I pay my Employers PAYE/NI bill at year end, I enter this as a bank transaction against the ‘Tax Payable’ Account. However with no accruing tax liability through the year, I end up with a negative number showing in the Tax Payable row under ‘liabilities’.
Can you confirm the best place to enter this tax liability prior to payment so that when I pay it, I have a zero balance in the Tax payable row? I have not used journal entries up until now, but is this the best way of allowing me to continue using this method and balancing the books?
Tax payble should not be involved at all. Tax payable is for your VAT. It nets input and output VAT to show you what remains to be remitted (or refunded) to (from) the tax authority.
PAYE and NI should be set up as deduction payslip items if you are going to set them aside during the year as deductions from your own salary. If you are referring to an employer’s contribution, they should be set up as contribution payslip items. Read about payslip items here: Manager Cloud.
Okay lets start from the situation for a normal employee and then address that to your situation.
Lets say the employee earns 500 (gross) and the PAYE is 100, so 500 goes to the wages expense account, 100 to the payroll liabilities account and 400 to the employees clearing account (take home).
Now for your situation, when you create the monthly payslip is it for 500 or is it for 400.
If its for 500, then you have paid yourself the tax which should have been deducted therefore at year end it should be a personal payment not a business payment, otherwise that would make the gross wages paid 600.
If its for 400, then the year end tax payment goes to the wages account so that it now totals 500.
It seems that the correct manner to handle this is to include the tax as a deduction in my payslip and hold this in the company account until it discharges its liability by paying the tax authority, the issue is that I don’t know the exact liability until year end and its confirmed by my accountant. I know approximately but not exactly. The tax is being deducted from the employee but not being paid to the tax authority until year end.
One solution would appear to be to treat it like a corporation tax and create two accounts:
Employers PAYE (Expense)
Provision for Employers PAYE (liability)
Then create a journal entry to debit the expense account and credit the liability account at year end, credit the payment to the liability when the tax is paid, thus changing the balance to zero.
How can this be?
The rules for calculating tax and National Insurance are well known and documented. The tax you pay as an employee should not be confounded with the income tax due in total.
If I understand you correctly, you are describing what Manager does. Deductions are subtracted from the amount owed to the employee in Employee clearing account. Instead of appearing there, they are posted to the Payroll liabilities account. When you pay the tax authority, you post the payment to Payroll liabiliteis, reducing that balance. As @Joe91 has written, this liability should not be confused with your total tax due at the end of the year. It is only the amount that has been deducted from your paycheck (not your payslip) and paid in advance by the company on your behalf. In most jurisdictions, payments of such withheld amounts are remitted monthly or quarterly, not at the end of the year.
You should also not confuse deductions with employer payments of any portion contributed. Deductions are purely employee payments, collected by the employer on behalf of the employee and forwarded to the tax authority.
If there are employer contributions, those must be defined as contributions. For example, an employee might see 5% deducted as her share of a government benefit premium. Meanwhile, the employer might match that 5% with an employer contribution. Contributions are also posted, by default, to Payroll liabilities and to Wages & salaries as an expense. You might find it helpful to assign different categories of payroll liabilities to individual accounts created for that purpose.
The important thing about Payroll liabilities is that they are owed to some outside entity. The company is, in effect, holding them in trust.
Yes, by using the exact tax & NI amounts that relate to that payslip’s earnings amount.
The process here really depends on where the accountant’s adjustment is going to be applied.
Using the above modelling if at year end the business accounts has wages expense of 6000 (12 x 500) and payroll liabilities of 1200 (12 x 100) then is the accountant’s adjustment changing the business account values (6000 & 1200) or not.
If yes, then you can create a Payslip (or Journal Entry) dated the last day of the year to reflect those adjustments both + or -. The business pays the liabilities.
If not, then if the tax liability is higher then 1200, then the business pays the 1200 and you personally pay the difference. If the tax liability is lower (say 1150), then the business pays the 1150 amount and transfers the difference (50) to the Employee Clearing account.
Noting: that “owner” employees within a UK limited company have special rules (annual payment etc) compared to “normal” employees, where there also appears to be an incentive for the “owner” employee to pay themselves a smaller salary in lieu of a larger annual dividend. This salary/dividend process causes these year end salary calculation adjustments.