[ Back ]  [ Contents ]   [ Home ] [ Next ]

Virtually all businesses employ people and pay them weekly wages (or monthly salaries). In this chapter we will tackle the basic accounting issues surrounding this transaction.

Accounting for wages and salaries can get confusing because of Income Taxes  and National Insurance Contributions  (NIC ). However once we focus on the accounting effect only, the transactions  are easy to understand.

As background information, the main difference between Income Tax and National Insurance is that Tax is used to provide government benefits that are available to and can be claimed by all citizens. National Insurance Contributions  on the other hand, are used to provide government benefits and services to citizens in unfortunate circumstances (like unemployment, illness, etc).

It is the employees  duty (and liability ) to pay the Taxes and NIC  due on any income they receive. However, the Government  prefers to collect taxes and NIC on wages and salaries from the employers before the employers pay their employees. The scheme through which this is done is usually called a “Pay As You Earn ” (PAYE ) scheme. You could say that employers are tax collectors for the government.

In addition, some Governments also levy the Business with a further amount of NIC  in respect of the wages and salaries that it pays to its employees . This NIC liability  is that of the Business (not of the employee).

So employers need to know how to compute the tax and NIC that is due in respect of the employees  wages so that they can pay their employees wage net of employee taxes & employee NIC  and pay the government the total tax and NIC due.

In our working example The Company Limited is due to pay its employee a Gross  Salary of £1,000 for the period:

Simplified Wages, Tax and NIC calculation

(Contact your local government agency for actual rates and computation methods)

Now that the taxes and NIC  calculation is done, we can easily extract the following expenses  and liabilities  necessary for accounting purposes:

Note that the wage expense  represents the value of the employee’s  service that flows into the business, while the liabilities  represent the cash that will flow out of the business to acquire this service. Both expense and liability should be equal in value.

Once again, the above tax and NIC  computations are a simplified version of what happens generally. You must contact your Local Government  Tax Agency who will be able to send you details on how to compute the correct taxes and NIC that should be collected and paid in respect of wages and salaries that you pay to your employees .

[ Back ]  [ Next ]