There are circumstances in which a deduction may be made from an employee’s pay. Common examples include:
- Pension contributions
- Staff loan deductions
- Deductions for damage
- Car Salary scheme
This FAQ will take you through how to account for each deduction in Xero.
Pension contribution
In this scenario, a deduction is set up in payroll settings and the liability account should be chosen as pensions payable.
Once payroll is processed the Xero payroll journal automatically posts the employee pension contribution deduction to the pensions payable account.
The payment should also be posted to the pensions payable account and this should then revert back to a NIL liability.
This is an example of a standard deduction in Xero – so it is incorporated into the Xero system. However, there may be times that a non-standard deduction is needed. In these circumstances, a ‘holding’ liability account should be linked to the deduction in payroll settings, to capture these deductions, and reviewed each month end in order to transfer the amounts to the correct account.
A few examples are given below:
Staff loan deduction
In this scenario, a staff loan has been paid to the staff member in advance of salary payments, and an agreement put in place that a fixed sum will be deducted from their salary each month until the loan is repaid.
The initial payment of the staff loan should be posted to a new account on the balance sheet called ‘staff loans’ This is an asset account as it reflects the fact that the loan will be recovered from the employee.
The payroll deduction line cannot be set up to the ‘staff loan’ account as this is an asset account, not a liability account.
We therefore suggest the deduction is set up to another new account – staff loan deductions, which needs setting up as a liability account.
Each month end, following the pay run, a manual journal will be needed to transfer the value of the staff loan deduction from the staff loan deductions to the staff loan account.
The staff loan account will therefore show the reducing value of the loan due from the employee, and the staff loan deductions account should be £0.
This journal can be set up as a repeating journal if the loan deductions are to be the same value each month, with an end date input for when the loan is due to be repaid.
Deduction for damage
In this scenario, a deduction from an employee’s wage has been agreed due to damage to company property, which requires a repair.
Note – employers cannot automatically make deductions for damages unless the employee has agreed to the deduction, or it is expressly allowed for in the employment contract and you should seek employment law advice before making such deductions.
The deduction should be posted as other income to the profit and loss account, in order to match against the costs of repairing the item. VAT will also be charged on the supply of the repair.
However, the payroll deduction line set up for ‘damage to equipment’ can only be set up to one liability account.
We therefore recommend the deduction is set up to a different new liability account – staff damage deductions.
At the month end, following the payroll, a manual journal will be needed to move the correct split of the deduction from this account to other income and VAT payable.
The staff damage deductions account should be NIL once the transfer has taken place
Car Salary Scheme
Please see the related FAQ on Accounting for a car salary sacrifice scheme.
Best practice
We always recommend a separate nominal code is set up for each staff deduction account. In the above examples we would have 3 liability accounts which would need transferring out each month.
This helps monitor if all deductions have been taken correctly and allocated to the correct nominal code.
For each deduction nominal – the value after each transaction is complete should be NIL.
If you need help with this, or with other advice, then please get in touch with our accounting team.