How to show deductions under salary sacrifice

This article explains how to record salary deductions in FreeAgent, such as pension contributions or the car and cycle to work scheme, when an employer is making contributions and the employee is using salary sacrifice.

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.

To record the salary sacrifice, you’ll need to reduce the employee’s wage by the amount of the salary sacrifice and then create journal entries to balance the relevant account (e.g. the pension creditor account). Once the money has been paid out of your business bank account, you’ll then need to explain the payment to the relevant account.

If the salary sacrifice is relating to a scheme (like the cycle to work scheme) you may wish to create a new category in FreeAgent to explain the payments to.

You’ll need full (level 8) access to your FreeAgent account to follow the steps below.

Reduce the employee's wage by the salary sacrifice

You’ll need to deduct the amount of the salary sacrifice from the employee’s wage. This means that the amount of the salary sacrifice won’t be reflected anywhere on the employee’s payroll profile or payslip. For example, if your employee’s gross monthly pay would be £2,000 and they want to take £200 off their pay to contribute to a salary sacrifice scheme, record their basic pay as £1,800.

When using this method for pension contributions under salary sacrifice, don’t enter an amount in either of the ‘Net Pay Contributions’ or ‘Relief at Source Contributions’ fields on the employee’s payroll profile or payslip. If the business is making a contribution for the employee, enter that amount in the 'Employer Contribution' field.

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Create journal entries to balance the accounts

Next, you’ll need to create the following journal entries dated the same day as the payroll, for the amount that the employee is sacrificing (£200 in the above example):

  • Credit relevant code (e.g. ‘813 - Pension Creditor’) or the new category set up for the scheme

  • Debit code ‘401 - Salaries’ if the employee is not a director or code ‘407 - Directors' Salaries’ if they are a director

If you're unsure which journal entries are required, please ask your accountant.

Explain the payment

Once the relevant bank transaction has been imported in FreeAgent via a bank feed or uploaded from a bank statement, you’ll need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below.

Navigate to the ‘Banking’ tab at the top of the screen, select ‘Bank Accounts’ from the drop-down menu and choose the relevant bank account from the list.

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Select the transaction, and if it relates to the payment to a payment to the pension company, select ‘Other Money Out’ from the ‘Type’ drop-down menu and ‘Pension Creditor’ from the ‘Category’ drop-down menu.

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If the payment relates to a different salary sacrifice scheme and you've created a custom category for the payments, select Payment or Other Money Out as the transaction Type, depending on the type of category you've created.

Select ‘Explain Transaction’ to complete the process.

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