{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.
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. |
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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). |
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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. |
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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. |
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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. |
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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. |
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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. |
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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:
J Allen, Jeweller | |||||
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Date: | 25 September | ||||
Name: | Miss S Bennett | Tax Code | 350L | ||
Gross pay for month | 1,000 | ||||
Less deductions | |||||
PAYE | 163 | ||||
National Insurance | 80 | ||||
243 | |||||
Net Pay for month | 757 | ||||
Employer's National Insurance | 102 | ||||
Deductions from employee: PAYE | 163 |
Employee's NI | 80 |
243 | |
Employer's NI | 102 |
Total due to HM Revenue & Customs | 345 |