Payroll bookkeeping for small employers: journals, PAYE, pensions and deadlines

Taking on your first employee is a milestone, and a surprise. Payroll is not just paying a wage. It brings tax, National Insurance, pensions, deadlines and reporting that must all be recorded correctly in your books. This article explains what payroll bookkeeping involves, how the journals work, how to reconcile what you owe, and the dates to remember. It is written for small employers, including limited companies that pay their director a salary.

Payroll processing versus payroll bookkeeping

These are different jobs, and it helps to separate them.

Payroll processing is working out each person's pay, tax, National Insurance and pension deductions, producing payslips and sending reports to HMRC. It is normally done in payroll software.

Payroll bookkeeping is recording the results in your accounts, matching what you pay out to staff and HMRC, and checking that the liabilities agree with what payroll says you owe.

Both matter. Our payroll bookkeeping service covers the second, working alongside your payroll software or provider.

The elements of a payroll run

For each pay period, a payroll produces these figures.

Gross pay. The total earnings before any deductions.

Employee deductions. Income tax under PAYE, employee National Insurance, pension contributions, and any other deductions such as student loans.

Net pay. What the employee actually receives in their bank account.

Employer costs. Employer National Insurance and employer pension contributions, which are costs to the business on top of gross pay.

The payroll journal

After each run, a journal posts the figures to your accounts. A typical journal looks like this.

Account	Debit	Credit
Wages and salaries (expense)	Gross pay
Employer's National Insurance (expense)	Employer NI
Employer pension cost (expense)	Employer pension
PAYE and NI liability (HMRC)		Income tax plus employee NI plus employer NI
Pension liability		Employee plus employer pension contributions
Net wages payable		Net pay

When you then pay the staff, you clear the net wages liability against the bank. When you pay HMRC, you clear the PAYE and NI liability. When you pay the pension provider, you clear the pension liability. At month-end, all three liabilities should equal what is due but unpaid. Any difference needs investigating.

What employer National Insurance costs

From April 2025, employers pay Class 1 secondary National Insurance at 15% on employee earnings above the secondary threshold of £5,000 a year. That threshold means that even a modest salary carries an employer cost. Eligible employers can claim the Employment Allowance, which reduces the employer National Insurance bill by up to £10,500 a year. It is not available to a company where the director is the only employee paid above the secondary threshold, and it is not available to some other employers such as certain public bodies. Check your eligibility and record the allowance in your payroll software, and in the accounts as a reduction in the liability.

Pensions and auto-enrolment

Employers must automatically enrol eligible workers into a workplace pension scheme and pay employer contributions. The minimum total contribution is 8% of qualifying earnings, of which the employer pays at least 3%. Qualifying earnings are the slice of annual earnings between a lower and an upper limit, and these limits are set by the government. Contributions are deducted from pay and sent to the pension provider, usually monthly. In the books, record the employee deduction and the employer contribution, and clear the pension liability when you pay the provider. Auto-enrolment has deadlines, including re-enrolment and declarations of compliance to the Pensions Regulator, so build these into your calendar.

HMRC payment and reporting dates

What	When
Full Payment Submission	On or before each payday
Employer Payment Summary	By the 19th of the following month, if needed, for example to claim allowances
PAYE and NI payment, electronic	By the 22nd of the following month
PAYE and NI payment, cheque	By the 19th of the following month
P60 to employees	By 31 May
P11D and P11D(b)	By 6 July for benefits in kind

Smaller employers can sometimes pay quarterly if their average monthly bill is below a threshold set by HMRC. Late reports and payments attract penalties, so file and pay on time. Our guide to Self Assessment deadlines and key tax dates includes the broader calendar.

Reconciling payroll

A monthly payroll reconciliation is simple and catches errors early.

1. Compare the payroll report to the journal. Gross pay, deductions and employer costs should match.
2. Check the net pay payments against the bank.
3. Reconcile the HMRC liability to what you owe and what you have paid.
4. Reconcile the pension liability to the provider's records.
5. Check for allowances. Confirm Employment Allowance has been applied correctly.
6. Investigate any balances that do not clear.

Liabilities that grow without being paid are the most common sign that something has gone wrong. See our post on how to reconcile a bank account for the same discipline applied to the bank.

Directors and payroll

A limited company director who takes a salary is an employee for this purpose. Many directors take a salary at a level that balances tax and National Insurance, with the rest of their pay as dividends. The salary is a company expense and goes through the payroll in the normal way. Use our director salary and dividend calculator to compare different levels. If you take money out without payroll, it goes to the director's loan account. See director's loan account explained.

Statutory payments and other deductions

Statutory sick pay, maternity pay and other statutory payments are recorded as part of gross pay, and employers can often recover a portion. Student loan deductions and attachment of earnings orders are liabilities that must be paid over to HMRC or the relevant authority. Record each in its own liability account so it can be reconciled.

Which payroll software?

Many cloud accounting systems include or integrate with payroll. Xero, QuickBooks and FreeAgent offer payroll or connect to payroll products, which post journals automatically. A dedicated payroll provider or bureau can also manage the processing for a fee. Whichever you choose, make sure it is approved for Real Time Information reporting and that the journals reach your accounts. See our guide to choosing accounting software.

Common payroll bookkeeping mistakes

• Not posting the employer National Insurance and pension costs
• Recording net pay only, so wages are understated
• Missing the 22nd payment deadline
• Not reconciling the HMRC liability
• Forgetting to apply the Employment Allowance
• Treating the director's pay as drawings
• Ignoring pension contributions and deadlines

How much time does it take?

For a small team, payroll bookkeeping typically adds around half an hour a month on top of core bookkeeping. At our flat £15 an hour that is about £7.50, which is a small price for correct records. See how much bookkeeping costs or get an instant quote with payroll ticked.

Frequently asked questions

When must I pay PAYE to HMRC?

By the 22nd of the following month if you pay electronically, or the 19th by cheque.

What is employer National Insurance?

A tax paid by the employer on employees' earnings above the secondary threshold, 15% from April 2025.

Can a company with one director claim Employment Allowance?

Generally not, if the director is the only employee paid above the secondary threshold.

Do I need payroll for myself as a sole trader?

No. Sole traders do not pay themselves a salary. They take drawings from profit.

Can you do my payroll bookkeeping?

Yes. We post the journals and reconcile the liabilities every month. See payroll bookkeeping.