Navigating PAYE Directors' Remuneration and Staff Salaries in Non-Aligning Accounting Periods

For businesses where accounting periods don’t align with the UK tax year ending on 31 March, managing PAYE directors' remuneration and staff salaries can be a tricky balancing act. To ensure your financial statements remain compliant and accurate, it’s essential to understand accruals and how to correctly report remuneration and salaries within the company’s annual accounts.

Here’s a straightforward guide to help businesses achieve just that.

Why Accruals Matter

Accrual accounting ensures that income and expenses are recorded in the period they’re incurred, rather than when they’re actually paid. This principle applies to directors’ remuneration and staff salaries, helping to reflect the true financial health of the company within its accounting period—even if the payments cross over into the next tax year.

How to Manage This When Periods Don't Align

If your company’s financial year doesn’t match the tax year, you’ll need to prorate any remuneration or salaries overlapping the periods and report the accrued amounts in your financial statements. Transparency and accuracy are key to compliance with accounting standards.

Example of Accruals Calculation

Imagine the following scenario:

• Company’s accounting year ends on 31 August 2024.

• Directors’ remuneration: £120,000 annually (£10,000 monthly).

• Staff salaries: £240,000 annually (£20,000 monthly).

  
  

Step 1: Pro-rate the Expenses

For expenses incurred from 1 September 2024 to 31 March 2025 (7 months), calculate the accruals:

• Directors’ remuneration: £10,000 × 7 = £70,000.

• Staff salaries: £20,000 × 7 = £140,000.

Journal Entries Example

Here’s how the company would record these accruals as of 31 August 2024:

Accrued Directors’ Remuneration

• Debit: Directors’ Remuneration Expense £70,000

• Credit: Accrued Expenses £70,000

Accrued Staff Salaries

• Debit: Salaries Expense £140,000

• Credit: Accrued Expenses £140,000

To make the accrual process complete and transparent, we must also account for reversal journals. These entries ensure that the accruals created in the previous accounting period are cleared once the actual payment is recorded in the current period. Here's an example with reversal journal explanations:

Reversal Journals Explained

At the start of the next accounting period (1 September 2024), the accruals must be reversed to ensure expenses are not double-counted when the actual payments are made.

Reversal Journal Entries (1 September 2024):

1. Reverse accrued directors’ remuneration:

   • Debit: Accrued Expenses £70,000

   • Credit: Directors’ Remuneration Expense £70,000

2. Reverse accrued staff salaries:

   • Debit: Accrued Expenses £140,000

   • Credit: Salaries Expense £140,000

These reversal entries effectively "zero out" the accruals recorded at 31 August 2024. When the company makes payments from September 2024 onwards, the expenses will be correctly recorded in real-time without duplication.

Why Are Reversal Journals Necessary?

• Avoid Double-Counting: Without reversal journals, the same expense might appear twice—once as an accrual and again upon payment.

• Transparency: Reversal ensures financial statements clearly reflect expenses only in the periods they belong.

• Compliance: Proper accounting aligns with standards like IFRS or GAAP, ensuring accuracy for audits and tax reporting.

By integrating reversal journals, you maintain a clean, compliant, and transparent accounting process.

Best Practices for Managing PAYE and Salaries

1. Clear Documentation: Maintain accurate records of all payments and accruals.

2. Regular Reviews: Review expenses and accruals periodically to avoid misstatements.

3. Consult Your Accountant: Tailored advice from your accountant or bookkeeper is invaluable, especially when dealing with complex scenarios.

   
   

Conclusion

Managing PAYE directors' remuneration and staff salaries when your accounting year doesn’t align with the tax year may require extra care, but it’s far from impossible. With clear calculations and proper accruals, businesses can ensure accurate reporting and maintain compliance with accounting standards.

At Accountant Bookkeeping Ltd, we’re here to help simplify these complexities so you can focus on growing your business. If you’d like expert guidance tailored to your company’s specific needs, don’t hesitate to reach out to us today!

Addional reading

The UK tax year ending on 31 March (or 5 April, historically) has its roots in a mix of historical and practical reasons:

1.     Historical Calendar Shift: The UK used the Julian calendar until 1752, when it switched to the Gregorian calendar. This change caused an 11-day shift, moving the start of the new tax year from 25 March (Lady Day) to 5 April. Over time, 31 March became a practical equivalent for accounting purposes.

2.     Administrative Convenience: Aligning the tax year with the end of March simplifies financial reporting for businesses and individuals, as it avoids the busy holiday season at the end of December.

3.     Legacy Practices: The system has remained largely unchanged due to its long-standing use and the complexities involved in transitioning to a different date, such as 31 December.