Keeping track of pension contributions in accounting journals.
For many of my clients that just post wages straight from the bank, they find that there is no way to tell if they have paid staff correctly. To audit transactions a control account needs to be created to compare what has been paid to what should have been processed (see previous article). They also are unable to reflect a true liability for PAYE payments to HMRC for similar reasons as at the end of year you will always be owing one month’s instalments (pay in the following month). Now that pensions contributions/payments have come into effect, your salary journal template will need to be changed to track this new type of expense.
How to journal in accounts for pension contributions?
On a basic level, pensions involve an employee’s own contribution with the employer to top up. The employee’s contribution would be deducted from their wages and the employer top up is a legitimate company expense claimable against corporation tax. That means that the nett wages of employee are reduced by that amount and you have a new salary nominal code for “Employers pension expense”. But what about the credit side? Who do you owe the money too? It won’t be the employee under “Nett wages” as they don’t receive the money, or at least not yet. It is held on their behalf by the pension provider (I.e. Nest) who will accumulate, invest and administer their fund until they retire. Yet just like PAYE you need to track what has been paid and deducted from employee wages and then hand it over. Each wage slip will have the details and the combined monthly (or weekly, fortnightly) amounts that should provide the total amounts for the period. No matter what size of company the journal should be this simple as it is easier to control the amount of liabilities against what has been paid. These are some examples below:
The payment from the bank account should be set against the control account as the liability has been declared from the previous month:
Produce an audit trail to prove pension payments.
So, the principle is the same. What is owed to the pension company (or companies) is placed in a new liability account called “pension control” account as a credit. Then when paid from the bank, it debits the pension control to release the amounts in the following month. At the end of the financial year the amounts owing on your annual accounts should be exactly what was processed on the last months payroll. That way you know that everything you have posted during the year is correct and no further reconciliation needs to be done. It is the same for reconciling your PAYE control account. Net wages, unless for extenuating circumstances should have cleared within the year. This method is best practice for maintaining the robustness and integrity of accounts and tracking your payroll liabilities and payments.
About the Author:
Malcolm Ford has been advising companies on how to implement accounting and ERP systems for medium sized companies across the UK.