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PAYE tax refunds UK

Started by Ian Sheekey in Payroll Feature Requests | Idea

I have recently had several clients having the same problem with tax refunds for their employees. You are not able to enter a minus tax figure into the pay run journal and therefore cannot get the correct net pay and overall tax liability figures for that pay period.

We have a work around, but it is to net the refund against another employee who has a tax deduction greater than the refund so that you get correct tax figure and then make an equal and opposite adjustment to gross pay so that the individual employees net pay is right.

Overall, the posting of gross pay to the P&L is then correct and you can match the payments in the bank, but if you look at the payroll history for the employee it will not be correct overall.
Official Xero Reply
Part 1 of 2

If you are currently using Pay Run please see below to record a Tax refund.

You cannot enter a 'negative' Tax adjustment for a previous Tax overpayment. You can enter a refund and reduce the amount that is payable to HMRC. We suggest the following.

Before creating a pay run
1 - Create a new Pay Item called Tax Refund or similar suitable. This could be entered as an Allowance.

2 - Whilst any expense account could be chosen as the Account for Reporting we recommend creating a new Tax Refund Expense Suspense account for this purpose.

Xero Help Centre
Add a Pay Item
Chart of Accounts - Add account

 

Oliver Furniss (Xero Staff)

Best Reply as chosen by Brittany H (Community Manager)
Part 2 of 2

Create the pay run
3 - Select the new Pay Item as required for the employee requiring the Tax 'refund' and enter the amount on this item.

You will notice the Net Pay increases as a result. Enter other pay items as normal. You should also note at this point or perhaps during the next step when reviewing the details that whilst the Net Pay is correct, the Tax amount is incorrect and does not take into account the refund. Similarly the addition of the Allowance is technically incorrect. This isn't something that we can amend at present and is there to force the net wages to the correct amount.

You should now have the correct net wages entries and wages expense postings but the tax will show only the amount of the latest pay run. The refunded amount will be included in the Tax Refund Expense Suspense account.

4 - Raise a Credit Note to the HMRC for the amount of the tax refund. Code the credit note to the Tax Refund Expense Suspense account (as used above).

Xero Help Centre
Add or edit a credit note for a customer - Add a new credit note or edit details

5 - As you are unable to apply a credit note to a pay run invoice to reflect the reduction in the invoice to HMRC you will need to ensure that when you pay HMRC you pay the net of the HMRC payable invoice less the credit note. Apply the payment directly to the blue payment boxes on the invoice and credit note itself from the awaiting payment tab

6 - You can then select these 'paid' transactions from Find & Match in the Bank Reconciliation to match the payment to the HMRC as it appears on your bank statement - (Note To select the credit note you will need to tick Show Received items)

Xero Help Centre
Pay invoices - make full or part payments - Make an invoice payment

Bank reconciliation - Search and find transactions to reconcile with statement lines

We appreciate this does include some extra steps and may not be a suitable long term solution but hope it helps in the meantime.
 

Oliver Furniss (Xero Staff)