What are Payroll Liabilities? Simple Guide for Beginners

Not sure what payroll liabilities actually mean? Many small business owners and freelancers struggle to keep track of what they owe to employees and HMRC. However, understanding payroll liabilities is key to staying compliant, avoiding penalties, and keeping your finances in check.

Key Takeaways

• Payroll liabilities are amounts you owe related to payroll, like unpaid wages, PAYE, NICs, and pension contributions.

• They appear as current liabilities on your balance sheet and need to be paid to HMRC or pension providers on time.

• Staying on top of them helps you avoid penalties, manage cash flow, and keep your business running smoothly.

What Counts as a Payroll Liability?

When you run payroll, it’s not just about what’s been paid - it’s also about what’s still owed. These unpaid amounts are known as payroll liabilities, and keeping track of them is key to staying compliant and avoiding penalties.

Here are the most common payroll liabilities examples:

• Wages and salaries owed: Pay for work employees have already done but haven’t been paid for yet.

• PAYE income tax: Tax deducted from employees’ wages that you’re responsible for passing on to HMRC.

• National Insurance contributions (NICs): Both the employee’s share (deducted from their wages) and your employer contribution.

• Pension contributions: If you offer a workplace pension, both your contribution and the portion deducted from employees' pay.

• Student loan repayments: Deductions made from employee pay that need to be sent to HMRC.

RELATED: What is the Payroll Payment Process Like? (Step-by-Step)

What are Payroll Liabilities on a Balance Sheet?

What are payroll liabilities in accounting? When you prepare a balance sheet for your small business or freelance operations, it's important to understand where payroll liabilities fit in. These liabilities represent amounts you owe related to payroll but haven't yet paid. 

On the balance sheet, they are categorised under current liabilities, reflecting obligations due within the next year.​

Payroll Liabilities vs Payroll Expenses

Knowing the difference helps you stay on top of your payroll and keep your records clean.

• Payroll expenses are what your business spends to pay employees like gross wages, employer NICs, and pension contributions. These are your costs.

• Payroll liabilities are amounts you've deducted or owe but haven’t paid yet like PAYE tax, employee NICs, and pension deductions you still need to send off.

Think of it like this:

Expenses = money going out. 

Liabilities = money you still owe.

What We Think

Payroll liabilities can be confusing, especially if you’re running a small business or freelancing on your own. We’ve seen many people mix them up with payroll expenses or forget about them until it’s time to pay HMRC, and by then, it can cause problems.

If you don’t keep track of what you owe, it’s easy to miss deadlines, run into cash flow issues, or get hit with late payment penalties.

How JAFA Can Help

JAFA takes the stress out of managing payroll liabilities. It keeps track of what you owe, like PAYE, National Insurance, and pension payments, and helps you stay on top of deadlines.

You don’t need to worry about forgetting to pay something or making mistakes. JAFA shows you what’s due, when it’s due, and helps you stay organised so you can avoid late payment penalties.

Contact our expert accountants based in Birmingham, UK, either by booking a FREE discovery call or calling us on +44 121 227 6277.