Wages & salaries · Level: Exam
Journal entry: Payroll with deductions
The expense is gross pay. Only net pay is transferred; tax and NIC are held back and paid later.
Worked example
Payroll: gross wages £22,700.00, PAYE income tax £3,780.00 and employees' NIC £1,660.00 deducted. Net pay is transferred; the deductions are paid to HMRC later.
Correct journal entry
Wages and salaries £22,700.00 / Bank £17,260.00, PAYE and NIC payable £5,440.00
Debit
Wages and salaries£22,700.00
Credit
Bank£17,260.00
PAYE and NIC payable£5,440.00
Why?
- Wages and salaries: expense incurred → debit
- Bank: asset decreases → credit
- PAYE and NIC payable: liability increases → credit
Calculation
- Net pay: £22,700.00 − £3,780.00 − £1,660.00 = £17,260.00
Typical mistake
Booking only net pay as the expense.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
Payroll: gross wages £10,700.00, PAYE income tax £1,830.00 and employees' NIC £720.00 deducted. Net pay is transferred; the deductions are paid to HMRC later.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for payroll with deductions?
Example: Wages and salaries £22,700.00 / Bank £17,260.00, PAYE and NIC payable £5,440.00.
How do I recognise this case?
The expense is gross pay. Only net pay is transferred; tax and NIC are held back and paid later.
What is the typical mistake?
Booking only net pay as the expense.