How to process statutory pay received in advance

This article explains what to do if you receive an advance lump sum payment of statutory pay from HMRC.

Please note that FreeAgent's payroll functionality won't be available if you have an unincorporated landlord or non-UK account type, or if you're preparing your accounts using cash basis accounting.

If you receive an advance lump sum payment of statutory pay from HMRC, you will need to explain the bank transaction in FreeAgent and then edit the relevant employee’s payslip each month.

You'll need full (level 8) access to FreeAgent to be able to edit an employee’s payslip.

Explaining the bank transaction

Once the payment from HMRC has been imported via your bank feed or uploaded from a bank statement, you will need to explain the transaction as detailed below.

1. Navigate to the relevant transaction

Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Choose the relevant bank account from the list.

Select the transaction that relates to the statutory payment.

2. Choose ‘Refund’ as the transaction ‘Type’

Select ‘Refund’ from the ‘Type’ drop-down menu.

3. Choose ‘PAYE/NI’ as the transaction ‘Category’

Scroll down and select ‘PAYE/NI’ from the bottom of the ‘Category’ drop-down menu.

4. Explain the transaction

Select ‘Explain Transaction’ to complete the process.

This will allocate the funds to your Balance Sheet where it will show as a liability as there is no justification yet in your accounts for the payment. This liability will reduce each month when you run payroll as the advance payment is used up against the relevant statutory reclaim each month.

If you’d prefer to not have this balance in your PAYE/NI account during that time, speak to your accountant about creating journal entries to move the balance to a separate account instead.

Editing the payslip

Before you file your payroll each month, you’ll need to edit the relevant employee’s payslip and enter the statutory pay in the appropriate field.

Navigate to the ‘My Money’ tab at the top of the screen and select ‘Payroll’ from the drop-down menu.

Select ‘Prepare Month [X] Payroll’ in the top-right of the screen. ‘X’ will be the number of the month for which you’re filing payroll.

Select ‘Edit Payslip’ to the right of the relevant employee’s name.

Scroll down to the ‘Statutory Pay’ section and enter the relevant details.

Select ‘Save Changes’ at the bottom of the screen to complete the process. For more information on editing a payslip, please see this article.

Repeat these steps each month before filing the payroll to HMRC.

What happens next?

FreeAgent will automatically reclaim the statutory pay at 103%, and file both a Full Payment Submission (FPS) and Employer Payment Summary (EPS) to HMRC for you. You’ll see confirmation of this in the ‘Payroll Summary’ panel in FreeAgent. For more information on how FreeAgent handles statutory payments, please see this article.

The amount of statutory pay that you are reclaiming each month needs to be reported to HMRC so that they have a record and can see how you're using up the amount they've paid you in advance.

As you have already received the statutory payment from HMRC you would ignore this deduction when you come to pay HMRC, in order to ensure the correct amount of tax and National Insurance is paid. If you’re unsure of how much to pay each month, you can check this by logging into your HMRC business tax account or by contacting HMRC directly.

If you or your accountant created journal entries when you received the statutory payment from HMRC to remove the balance from your PAYE/NI account, you'll need to create further journals to re-introduce the relevant statutory reclaim amount each month back into your PAYE/NI account. Please speak to your accountant if you’re unsure which journals to create.

In the accounting reports, the small employers’ relief is adjusted automatically through the relevant Employer NICs category which reduces the total PAYE/NI liability to HMRC.