Payroll management: how payroll accounting works

Elizabeth Dulcich photo
Elizabeth Dulcich

Published on January 19, 2024

At the end of 2023, there were around 36 million people employed in the United Kingdom, the vast majority of whom (about 30 million) were salaried employees. They’ve all got one thing in common: at regular intervals, they receive the same important document - their payslip. Most people first look at the bottom right corner, because this is where the net amount is shown. In other words, the amount that the employer will pay them.

Listed above the net amount, you’ll find a breakdown of exactly how taxes, social security contributions and other deductions are made up. This not only looks complicated, but is the result of a rather complex payroll accounting process. Find out in this article what companies should bear in mind when preparing their payroll.

New call-to-action

What is a payslip?

A payslip is a document that employers issue to their employees on a regular basis (usually monthly). It breaks down the employee's total salary. This includes the gross salary, any supplements, bonuses or overtime. At the same time, deductions such as social security contributions, taxes, National Insurance contributions, and any other deductions are listed. 

The net pay, i.e. what the employee receives after all deductions, is also shown. This statement therefore serves as proof of the employee's income and is important for personal financial planning and tax returns.

HMRC states on their official payslip page:

When you start work, your employer should tell you how much you’ll be paid and how often. They should also tell you:

  • the day or date you’ll be paid, for example each Friday or the last day of the month
  • how you’ll be paid, for example cash, cheque or bank transfer

Your payslip shows:

  • your earnings before and after any deductions
  • the amount of any deductions that may change each time you’re paid, for example tax and National Insurance
  • the number of hours you worked, if your pay varies depending on time worked

You might need to know how to work out your weekly pay if you have to claim payments for redundancy or compensation from your employer.

Learn more about HMRC’s PAYE system

What is payroll accounting?

An employee’s payslip is just one piece of the overall payroll process puzzle.

Our friends at Wise have got a great definition of payroll:

‘Payroll’ refers to the process of calculating and disbursing employees' wages, but its significance goes beyond just paying salaries.

It plays a crucial role in the smooth functioning of an organisation and ensures compliance with legal obligations. Key aspects of payroll include the following:

  • Calculating employee earnings.
  • Deducting taxes and National Insurance contributions.
  • Reporting pay details to HMRC.
  • And most importantly, ensuring timely and accurate payments to employees.

Whether you manage payroll in-house, outsource it to a specialised firm, or leverage payroll software, the process requires meticulous attention to detail and adherence to various rules and regulations.

Payroll accounting is the function of organising an employee’s payroll data (deductions, payroll taxes, benefits, etc.) and recording it in the financial journal along with other details such as date of compensation. All this data is then recorded in the company’s general ledger where it is kept for reporting purposes and to have an overview of the company’s financial situation. 

Forbes has an excellent and in-depth overview of the payroll accounting process if you’d like to learn more about it in detail.

How is payroll prepared?

Payroll prep is usually done with the help of special payroll accounting software that automates and simplifies the process. Because such programs are available for companies of all sizes at a reasonable price, manual work with spreadsheets is now pretty uncommon.

The matter of who handles payroll is up for debate. Sometimes, the finance team is responsible for payroll. At other companies, the human resources department manages payroll. Either way, the payroll administration process will remain the same. Note that some companies choose to outsource payroll to a third party if they don’t have sufficient resources to do it in-house.

The payroll process

This is what the typical payroll process looks like...

Step 1: Enter employee data

First, all relevant employee data is entered into the system. This includes personal information, tax class, social security contributions, salary details and other relevant factors such as allowances or deductions.

Step 2: Enter hours worked

The hours worked, overtime, sick days, holiday allowance, etc. are recorded for each payroll period. This step is partially omitted for salaried employees who receive a fixed monthly salary.

Step 3: Calculations

The program calculates the gross pay based on the data entered. Statutory deductions such as income tax, and social security contributions (health, pension, unemployment and long-term care insurance) are then automatically deducted.

Step 4: Prep payroll

The system generates a detailed statement showing the gross salary, the individual deductions and the net salary. This statement is then made available to the employee, often as a paper document or in electronic form.

Step 5: Reports and transfers

The program also helps with preparing necessary reports to tax authorities and social security institutions. It can also support the transfer of net salaries to employees and deductions to the relevant authorities and insurance companies.

Important: for a comprehensive and detailed list, consult the HMRC website to see the mandatory payroll information to report.

Optimise your payroll management

In order to create a payslip, data from various sources must flow together.

This is exactly where companies can start to optimise the process. 

  • Our first tip is to integrate systems for personnel administration and time management in order to simplify data flows.

  • Next, data fromspend management solutions (such as Spendesk) should be transferred automatically. This is because expenses such as travel costs or professional expenses incurred by employees often have to be reimbursed via payroll. In addition, certain expenses (such as tax-free allowances) can have tax implications that must be taken into account in payroll accounting.

  • At the same time, monitoring total spend, including salaries, is important for budget planning. Therefore, data from payroll should be fed back into budget and business planning tools.

All of this assumes that an efficient, integratedautomated accounting anddata management system is in place. These systems are crucial to ensure data accuracy and consistency, reduce manual errors and minimise the time spent on data entry and processing. With the right tools, companies can not only save time and resources, but also ensure that they comply with legal requirements and maintain a transparent financial overview.

This facilitates strategic planning, improves decision-making and supports the company's growth.

Available soon: integrate Spendesk and your HR tool

Keep your eyes peeled for exciting upcoming developments! A new feature is coming soon - the seamless connection between Spendesk and your favourite HR software. The new feature allows you to automatically update employee information, effortlessly add new users, and smoothly remove team members who’ve left. 

This makes onboarding and offboarding a quick and efficient process that can be completed in just a few minutes.

Synchronising data sources also ensures that any updates to employee information, be it name, address, or account details, are seamlessly integrated into Spendesk.

Book a demo with our experts today and find out more!

Process payroll effortlessly with better tools

Payroll accounting requires transparency and accuracy. By automating and integrating different systems for HR administration, time management and expense management, companies can optimise their processes while meeting legal requirements.

This is where Spendesk comes in as a spend management tool that can be seamlessly integrated into the overall payroll process, making financial management and reimbursement of employee expenses much easier.

Do you need more information about modern tools that can relieve both the finance and HR departments? No problem! Simply download our free guide - and discover the tools recommended by experts.

New call-to-action