There's a version of this conversation I've had more than once.

A founder shares their numbers. The profit looks healthy. Better than expected. They're pleased with how things are going.

Then we dig into the payroll and the picture changes.

Not because anything dishonest has happened. Not because the bookkeeper has made a mistake. But because the salaries going into the accounts aren't the real cost of employing people. They're just the bit that leaves the bank.

What actually happens when you run payroll

When you pay someone a net pay of £3,000 a month, that's not what they cost you.

That £3,000 is what lands in their account. But sitting behind it are costs that never went anywhere near the bank on payday.

Income tax withheld under PAYE. Employee National Insurance deducted from their pay. Employer National Insurance on top of that - which comes entirely out of your pocket. And pension contributions, both the employee's share and yours as the employer.

The full cost of that £3,000 salary is closer to £3,700 or £3,800 once you add it all up. Sometimes more depending on the salary level.

If only the £3,000 hitting the bank makes it into your profit and loss, your salaries line is wrong. And if your salaries line is wrong, your profit figure is wrong. It's higher than reality. The business looks more profitable than it is.

That's the trap.

Why it happens

This comes up a lot when bookkeeping is managed in house.

The payroll provider runs the numbers, pays the employees, reports to HMRC. They do their job correctly. But nobody sends the full payroll figures to the bookkeeper. Or the bookkeeper gets the payroll figures but doesn’t understand how to post the full salary journal. So the payroll journal - the entry that records the full cost including tax and NI and pension - never gets posted.

It's not negligence. It's a gap in the process. A handoff that nobody thought to check.

The result is a set of accounts that looks fine on the surface and tells you something that isn't true underneath, until you get to the year end accounts and your accountant points out its wrong.

What a payroll journal actually does

A payroll journal is an accounting entry that records the full picture every time payroll runs.

It captures the gross salaries - what people are actually paid before any deductions. The PAYE and employee NI that gets deducted from their pay. The employer NI that comes on top. The pension contributions on both sides. And the net pay that actually leaves the bank.

When this is posted correctly every month, your profit and loss shows the real cost of your team. Not just the cash that went out on payday.

It sounds like an internal accounting detail. It's actually the difference between knowing what your business made and thinking you know.

What it looks like when it goes wrong

Say you have a team of five people. Average salary around £35,000. Net pay after deductions averages out at roughly £2,400 a month each.

If only the net pay hits the accounts, your monthly salaries figure looks like £12,000.

The real cost - including PAYE, employee NI, employer NI and pension - is probably closer to £17,000 or £18,000 a month.

That's a £5,000 to £6,000 gap in your profit and loss every single month. Over a year that's £60,000 to £70,000 of costs that look like profit.

Decisions get made on the back of those numbers. Hiring decisions. Pricing decisions. How much to take out as dividends. All of it based on a profit figure that isn't real.

The fix

Ask one question of your bookkeeper or accountant.

Is the payroll journal being posted every month?

Not just the net pay. The full journal - gross salaries, PAYE, NI, pension, net pay. All of it.

If payroll is outsourced, ask whether the payroll provider sends a journal summary to the bookkeeper after every run. If they don't, set that up.

If you're not sure what's being posted, ask to see the salaries line in your accounts and compare it to what you know the team costs. If the numbers don't add up, you've found the gap.

It takes one conversation to fix. But first you have to know to ask.

If you are our client and we do your payroll, the answer is YES, we are posting the full salary journal. But when we see new clients Xero, this is a gap we see.

Why this matters more as you grow

When you have one or two employees the gap might be small enough that it doesn't change the picture dramatically.

As the team grows, it compounds. More people means a bigger difference between net pay and real cost. The profit figure drifts further from reality. And the decisions built on top of it drift with it.

The founders who know their numbers aren't just the ones with good reporting. They're the ones who know what goes into the numbers. This is one of those things.

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