Wages, tax, national insurance (social security), and pensions


This is not a general guide to pay related actions in Xero. For that use the guidance provided by Xero:

and, for specific UK issues:

Besides the appropriate accounting for employee-related costs, the main deliverables we want out of Xero payroll are:

Correct computation of:

  • Pay
  • Tax
  • NICs
  • Pension contributions
  • All the above when ad hoc changes are made to pay

Forms: P60, Payslips, P45 (or equivalent ex-UK)

Filing: HMRC for tax and NICs; NEST (or alternative) for pension contributions.

In this guide, for the time being, we only note some tips on how to do some things or avoid pitfalls awaiting the unprepared.

Pay template vs draft pay run

The employee’s pay and hours is entered under the Employment tab of the Employee view (Payroll/Employees.. then click on a particular employee).

All other pay-related items of a regular nature (like pension contributions) are entered on the Pay Template tab in the Employee view. (Note that the basic pay figure showing there is locked.)

While you can enter ad hoc deductions or additions here, be aware that this is a template for each period (month’s) pay items and the item you enter here will therefore appear every month until you remove it.  For ad hoc changes it is therefore recommended that you do not enter them in the pay template. Instead enter them on the employee’s details in the related draft pay run (initiated by Payroll/ Pay Employees.. then selecting the appropriate pay run in the drop down, then pressing Process Pay run).

Once you have the draft pay run in view, click on the name of the relevant employee to see their draft pay slip, where you have considerable scope to add items in different categories or change existing values:


Deduction types

There are some ready-made pay deduction types in Xero. But these can be edited, disabled, or added to. You can do this via: Top left: [Your organisation name in Xero]/Settings/Payroll Settings/Pay Items.

For example to add a deduction type, then click on Deductions and then on “Add” to the right. If you choose “Other” type from the list you will get a panel like this:

Notice that there are options to have the deduction either reduce or not reduce pay for tax, NIC, and pension purposes.  It is not recommended to use this to make deductions that do reduce pay in this way since Xero then shows the wrong pay to date against the employee and the wrong total pay in the accounts. Instead use a negative Back Pay or Bonus Earnings pay type – see “Deduction to recover an overpayment in the pay run itself” below.

The advice below employs the use of a deduction type ““Recover overpayment in relation to payroll value”, which you need to set up as follows (Calculation Type is “Fixed Amount”):

Specific deductions

Typically in the Pay Template, the only deductions that would be set up would be NEST pension contributions and Student Loan deductions. Other, ad hoc deductions should be made in the draft pay run – see “Pay template vs draft pay roll” above.

We mention here some specific cases encountered and how to manage them.

Deduction to recover an overpayment in relation to pay due

This is the case where – for example because a standing order was not corrected – an employee was paid more than was due to them in the pay run.

In this case make the correcting deduction from a future pay run in the draft pay run (not the Pay Template). See “Pay template vs draft pay roll” above. Add New Deduction of type “Recover overpayment in relation to payroll value” of the appropriate value. Save the change before posting the pay run.

Deduction to recover an overpayment in the pay run itself

This is the case were the employee was paid for too many hours, a bonus higher than it should be, a bonus or back pay paid inadvertently more than once, etc.. Here the deduction should reduce total and taxable pay, wage cost in the accounts, tax, NIC value, and pension contributions.

In this case DO NOT USE DEDUCTIONS in the pay run to make the compensating entry. Make the entry in the draft pay run (not the Pay Template). (See “Pay template vs draft pay roll” above.) Instead Add New Earnings of type Back Pay or Bonus but enter as a negative value the amount by which pay needs to be reduced. . Save the change before posting the pay run.

Note that you should not make deductions of this kind on pay runs in one tax year when they relate to overpayments in the previous tax year. In such a case you need to make the change to pay in the previous tax year via an “Unscheduled Pay Run” – see:

Once this has been done, in principle the correcting pay run should then compensate for the overpaid pay run (and hence no further adjustments are needed). You are advised to check this for yourself.

Charging staff to projects

See “Attributing salary costs to a project” in the Donor/Project tracking section.