Learn payroll by doing it

Gross pay is everything an employee earns in a pay period, before anything is taken off. Deductions are the amounts taken off, such as income tax, National Insurance and pension. Net pay is what is left, and it is what reaches the employee's bank.

So net pay is gross pay less deductions. A payslip shows all three for one payday.

The deductions do not belong to the employer. Income tax and National Insurance are passed on to HMRC. Pension contributions are passed on to the pension provider.

The employer also has two payroll costs of its own, which are never taken from anyone's pay: employer's National Insurance and the employer's pension contribution. The full cost of a payroll is gross pay plus those two.

Linnet Vets pays its staff monthly. This month gross pay is £8,600.00. Taken from pay are income tax of £1,124.00, National Insurance of £586.00 and pension contributions of £344.00. On top, the practice pays employer's National Insurance of £892.00 and a pension contribution of £430.00.

Net pay is £8,600.00 less deductions of £2,054.00, which is £6,546.00. The three amounts owed add up to £9,922.00, the full cost of the payroll, so every pound has somewhere to go.

• Read every line of a payslip and say what each deduction is.
• Work out gross pay from a salary, an hourly rate, overtime, commission, a bonus or piecework.
• Take one employee from gross pay to net pay, with the rates a question gives.
• Sort deductions into statutory, which the law requires, and voluntary, which the employee agreed to.
• Take a whole team from gross to net, and check the totals before anyone is paid.
• Work out what the employer pays on top, and the full cost of the payroll.
• Work out what is owed to HMRC and what is owed to the pension provider.
• Post the payroll journals through the wages control account, and check that it ends at nil.

The first module is for anyone with a job. The rest are for someone who runs a payroll or keeps the books for one.

1. Read your payslip. The lines of a payslip, gross pay and net pay, what a tax code does, National Insurance, and how to check that a payslip is right.
2. Gross pay. How pay is built up before deductions: salaries, hourly pay, overtime, commission, bonuses, piecework, holiday pay and unpaid time off.
3. Deductions from pay. Income tax through PAYE, National Insurance, pension contributions, student loans and other deductions, and which of them are statutory.
4. Running a payroll. Gross to net for a whole team, what the employer pays on top, how and when staff are paid, paying HMRC, reporting pay and keeping payroll records.
5. Payroll in the ledgers. The payroll in the books: the wages expense, what is owed to HMRC and the pension provider, and the wages control account.

A payroll is posted with four journals. Each one has a side in the wages control account, a general ledger account used only for payroll. These are the four for Linnet Vets.

The one credit of £9,922.00 equals the three debits, so the wages control account ends at nil. A balance left on it means a journal is missing or wrong.

The amounts owed to HMRC and to the pension provider are liabilities until they are paid. Each payment then debits the liability account and credits the bank.

The tax-free amounts, the rates and bands of income tax and National Insurance, the pension minimums, the minimum wage and the dates for paying and reporting are set by the government, and they change. None of them is given here. The current ones are on GOV.UK.

Every figure in a room is made up for practice, and a question gives any rate it needs. Ledger Drill is practice in how the sums and the records work. It is not tax advice.

• Treating net pay as the cost of an employee. The cost is gross pay, plus the employer's National Insurance, plus the employer's pension contribution.
• Taking the employer's National Insurance from the employee's pay. It is a cost to the employer and is never taken from the employee.
• Working National Insurance out the way income tax is worked out. PAYE looks at the pay and the tax for the tax year so far. National Insurance takes each pay period on its own.
• Leaving extra pay out of the deductions. Overtime, commission and bonuses are part of gross pay, and deductions are taken from them like any other pay.
• Paying the overtime rate on every extra hour. The contract says when the higher rate starts, and extra hours below that point are paid at the basic rate.
• Sending the staff the total of gross pay. The amount sent to the staff is the total of net pay.
• Hiding a balance on the wages control account by moving it to another account. The cause is found and put right.

Ledger Drill teaches payroll through questions, with no videos. A task is a few lines of reading and a payslip or a payroll table, then questions on it.

• Type gross pay for a week with overtime, or net pay after a list of deductions.
• Find the one wrong line on a payslip or in a payroll run.
• Match each line of a payslip to what it means.
• Sort deductions into statutory and voluntary.
• Post what is owed to HMRC, and check that the wages control account clears.

Every answer is marked at once, with the working behind it.

The modules and rooms are listed below, in order. A room that costs nothing carries a Free tag.