How to show pension contributions under salary sacrifice

This article explains how to record salary and pension contributions in FreeAgent 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 account 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 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 pension company.

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 as a pension, record their basic pay as £1,800.

When using this method, 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. Instead, only enter the employer's contribution in the ‘Employer Contribution’ field.

Create journal entries to balance the pension creditor account

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 code ‘813 - Pension Creditor’
• 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 to the pension company

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.

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

Select ‘Explain Transaction’ to complete the process.