{m}.{s}.1In this module we consider the UK deduction system for tax and national insurance. Many other countries will operate a similar kind of system.

Were it not for the system of deducting tax and national insurance from employees' pay, the ledger entries to record wages and salaries would be very straightforward.

This is the case where an employee's pay falls below the limits for tax and national insurance and therefore has no deductions.

Fist of money
Open/Close{m}.{s}.Q1

{m}.{s}.2Tax and National Insurance deductions

Payslip

Before considering the double entry involved, let us first see what deductions are made by an employer.

Let us consider an employee who is paid monthly at a rate of £12,000 p.a. We will look at Miss Bennett's payslip for the month of September - you can click on the green tabs above to see more detail about each item.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
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Date: 25 September

The salary will usually be paid monthly in arrears. e.g. September's salary will be paid about the end of September. (Some businesses pay at 4-weekly intervals).

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}b]

 

Tax code: 350L

The employee is issued with a tax code by HM Revenue & Customs (HMRC). This takes account of her annual allowances and determines her free pay for the month - this is the amount she can earn before any tax is deducted. Tax tables (or a computerised payroll system) then calculates the tax due for the month.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}c]

 

Less deductions: PAYE: 163

Income Tax is deducted under the PAYE (Pay As You Earn) system. The employer calculates the amount of tax due and pays it over to HM Revenue & Customs.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}d]

 

Less deductions: National Insurance: 80

The employee's national insurance contribution is calculated as a set percentage of the gross pay - again either from tables or by a computerised payroll system.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}e]

 

 

Total deductions: 243

The total deductions of £243 (the difference between gross and net pay) are paid over by the employer to HM Revenue & Customs on behalf of the employee. This is due to be paid over during the following month.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}f]

 

 

Net pay for month: 757

After deducting tax and national insurance, we are left with a net salary of £757. The employee receives a cheque for £757 instead of £1,000.

J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
[{m}.{s}g]

 

 

 

{m}.{s}.3Employer's National Insurance

The employer, however, has more than £243 to pay over to HM Revenue & Customs. He must also pay the employer's national insurance contributions.

Employer's NI is also calculated as a set percentage of the employee's gross salary. Note, however, the difference between employee's and employer's NI:

  • Employee's NI is deducted from her salary and is paid over to HM Revenue & Customs on her behalf.
  • Employer's NI is an extra amount the employer must pay to HM Revenue & Customs. This is an extra expense to the employer on top of the basic £1,000.
  • Employer's NI is also calculated as a set percentage of the employee's gross salary. Note, however, the difference between employee's and the employer's NI:
    • Employee's NI is deducted from her salary and is paid over to HM Revenue & Customs on her behalf.
    • Employer's NI is an extra amount the employer must pay to HM Revenue & Customs.
    • This is an extra expense to the employer on top of the basic £1,000.
J Allen, Jeweller
   Date:25 September 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,000   
Less deductions     
 PAYE163   
 National Insurance80   
  243   
      
 Net Pay for month757   
      
 Employer's National Insurance102  
      
[{m}.{s}h]

 

{m}.{s}.4Payment to HM Revenue & Customs:

 

Deductions from employee: PAYE 163
Employee's NI
80
  243
   
Employer's NI
102
Total due to HM Revenue & Customs 345
[{m}.{s}i]

{m}.{s}.5Elements of pay

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