How to record payroll by creating journal entries

This article explains how to record your payroll in FreeAgent by creating journal entries if you’re not using FreeAgent’s payroll functionality.

If you run payroll on a monthly basis, you can file payroll directly to HMRC using FreeAgent. Alternatively, you can file payroll outside of FreeAgent and then mark it as filed in FreeAgent.

However, if you run payroll on a different basis, for example weekly, you'll need to create journal entries to record your payroll by following the steps below. You’ll also need to create journal entries to record payroll if you have an unincorporated landlord account, prepare your accounts using the cash accounting basis or need to make adjustments to your payroll figures for a previous tax year.

You’ll need to have full (level 8) access to be able to create journal entries. You might find this payroll journal template download useful.

Please note that if you create payroll journals for the first few months of the current payroll year and then set up payroll in FreeAgent, you’ll need to enter year-to-date balances in your employee’s payroll profiles.

Creating payroll journals

Navigate to the ‘Accounting’ tab at top of the screen and select ‘Journal Entries’ from the drop-down menu.

Next, select 'Add New Journal Entries'.

Below is an example of the journal entries required when running payroll on a weekly basis. For each employee, for each pay period (e.g. week), you need to know:

• their gross pay
• PAYE tax deducted
• the amount of employee’s National Insurance (NI) that has been deducted
• the amount of employer's National Insurance (NI) that you'll pay for them
• their net pay (the amount of salary they'll actually receive)

For example, if you had an employee who earned £2,000 each week, before tax and NI, the following would apply:

• For the first week of June, their PAYE tax due might be £275.20 and employee's NI would be £167.76. Subtracting these means that their net pay will be £1,557.04
• As the employer, you could have to pay £194.71 in employer's NIC

To reflect this in FreeAgent, you would need to create the following journal entries, dated the same day as the employee’s payslip for the first week of June:

For an employee

• Debit code ‘401 Salaries’: £2,000 (the employee’s gross pay)
• Debit code ‘402 Employer NICs’: £194.71
• Credit code ‘814 PAYE/NI’: £637.67 (the total amount of tax and NIC due to HMRC: £275.20 + £167.76 + £194.71)
• Credit code ‘902 Salary and Bonuses’: £1,557.04 (the employee’s net pay)

For a director

• Debit code ‘407 Directors' Salaries’: £2,000 (the director’s gross pay)
• Debit code ‘408 Directors' Employer NICs’: £194.71 (the amount of employer's NIC only)
• Credit code ‘814 PAYE/NI’ £637.67 (the total amount of tax and NIC due to HMRC: £275.20 + £167.76 + £194.71)
• Credit code ‘902 Salary and Bonuses’: £1,557.04 (the director’s net pay)

Pension contributions

If you are deducting pension contributions from your employees' wages and paying them to a pension provider, you will need to create additional journal entries in FreeAgent to reflect this. You’ll also need to create corresponding journal entries for your contributions as the employer.

For example, if an employee has asked you to deduct £100 from their net wages each week to pay into a pension fund and you also contribute £50 to the fund, then you would create the following journal entries, in addition to the standard ones for the payslip dated the same day as the relevant employee’s payslip:

For an employee

• Debit code ‘902 Salary and Bonuses’: £100 (the amount that the employee’s net pay will be reduced by)
• Credit code ‘813 Pension Creditor’: £150 (both pension contribution amounts)
• Debit code ‘403 Staff Pensions’: £50 (the employer’s pension contribution amount)

The full journal for the payslip would then look like this:

For a director

• Debit code ‘902 Salary and Bonuses’: £100 (the amount that the director’s net pay would be reduced by)
• Credit code ‘813 Pension Creditor’: £150 (both pension contribution amounts)
• Debit code ‘409 Directors' Staff Pensions’: £50 (the employer’s pension contribution amount)

The full journal for the payslip would then look like this:

Employment Allowance

If you are claiming the Employment Allowance, then you will need to create the following extra journal entries to show the reduction in your employer's NI liability:

For an employee

• Debit code '814 PAYE/NI'
• Credit code '402 Employer NICs'

For a director

• Debit code '814 PAYE/NI'
• Credit code ‘408 Directors' Employer NICs’

Additional payroll deductions

If your payroll is not straightforward and there are other payroll deductions that you need to make, such as statutory payments to employees, please speak to your accountant about which journal entries you should create.

How to copy journal entries

If you need to create similar journal entries on a regular basis, you can save yourself time by copying an existing set of journal entries.

To do this, view the journal entries that you would like to copy in your FreeAgent account, select ‘Actions’ on the right-hand side and select ‘Copy to new journal entries’. This will create another set of those journal entries. Choose the relevant date for the new set of journals to complete the process.

How to explain the bank transactions related to your payroll in FreeAgent

After making the relevant payroll payments to your employees and HMRC as detailed above, you’ll need to explain those bank transactions when they are imported into FreeAgent via a bank feed or bank statement upload as described below.

Money paid to an employee or director

For a payment made to an employee or director for their salary, select ‘Money Paid to User’ as the transaction ‘Type’ and ‘Net Salary and Bonuses’ as the transaction ‘Category’ when explaining the bank transaction.

Money paid to HMRC

For a payment made to HMRC for PAYE and NI, select ‘Payment’ as the transaction ‘Type’ and ‘PAYE/NI’ as the transaction category when explaining the bank transaction, as detailed here.

Money paid to a pension provider

For a payment made to a pension provider, select ‘Other Money Out’ as the transaction ‘Type’ and ‘Pension Creditor’ as the transaction ‘Category’ when explaining the bank transaction.