UK Sick Pay Accounting: SSP, contractual top-ups and month-end reconciliation checklist

UK Sick Pay Accounting: SSP, Contractual Top-Ups, and Reconciliation

When a key team member calls in sick, the immediate problem is operational. But a financial puzzle quickly follows: how do you account for sick pay in a UK startup? The common confusion between government-mandated Statutory Sick Pay (SSP) and a company’s own policy is a frequent source of payroll errors and employee disputes. This guide provides a pragmatic, three-step process for handling staff sickness payments correctly, from payroll calculation to financial reporting, ensuring compliance and clarity for founders and investors. This sits within the broader topic of benefits accounting and accruals.

Step 1: Calculate Payroll Correctly with Statutory Sick Pay Rules

The first step is purely mechanical: calculating the correct payment for a sick employee. This process involves understanding two different types of pay: Statutory Sick Pay (SSP) and your own Occupational or Contractual Sick Pay (OSP).

Understanding SSP vs. OSP

In the UK, SSP is the government-mandated minimum you must pay eligible employees. To qualify, an individual “must be classed as an employee, have been off sick for at least 4 consecutive days, and earn an average of at least £123 per week” (GOV.UK). For the 2024/25 tax year, the current Statutory Sick Pay (SSP) rate is “£116.75 per week” (GOV.UK). It “is payable for up to 28 weeks,” but crucially, SSP “is not paid for the first 3 ‘waiting days’ of sickness” (GOV.UK).

Most tech startups offer more generous terms, known as Occupational Sick Pay (OSP), where the company policy might be to pay the employee’s full salary for a set period. The most common mistake is paying OSP on top of SSP. The correct method is to treat your contractual company pay as inclusive of any SSP the employee is entitled to. You are simply topping up the government-mandated amount to meet their full salary.

Example Calculation

Consider a software engineer at your SaaS startup who earns £52,000 per year (£1,000 per week). Your company policy is to pay their full salary for the first two weeks of sickness. They are off sick for one full week (Monday to Friday).

1. Total Gross Pay: Based on your company policy, their gross pay for the week is £1,000.
2. Calculate the SSP Portion: The first three days (Mon-Wed) are unpaid ‘waiting days’. They are only eligible for SSP on Thursday and Friday.
   • Daily SSP rate: £116.75 / 5 working days = £23.35
   • SSP payable: 2 days x £23.35 = £46.70
3. Calculate the OSP Portion: This is the company top-up amount needed to reach their full contractual pay.
   • OSP payable: £1,000 (Total Gross Pay) - £46.70 (SSP Portion) = £953.30

Your payroll software should handle this calculation automatically, but you must ensure the correct absence dates are logged. Getting this right prevents errors and ensures you have accurate records for UK payroll compliance.

Step 2: How to Account for Sick Pay Accruals Beyond Payroll

Once your payroll is correct, your accountant might mention ‘accruing for sick pay’. This is where accounting diverges from the cash-based reality of a payroll run. Accrual accounting, standard under FRS 102 in the UK, aims to match expenses to the period in which they are incurred, not just when cash leaves the bank.

For sick pay, this means creating a provision for paid leave that employees have earned but not yet taken. However, this only applies if you have a contractual obligation that accumulates. A policy that just meets SSP requirements requires no accrual. In contrast, a generous OSP policy that allows unused sick days to be carried over into the next year can create a liability on your balance sheet.

The reality for most early-stage startups is more pragmatic: formal sick pay accruals are often overkill at the pre-seed stage. As you scale and reporting becomes more formal, however, investors and auditors will expect to see this. For a Biotech or Deeptech startup, accurately tracking all staff-related costs, including potential sick pay liabilities, is vital for project costing and R&D tax credit claims.

Example Journal Entry for Sick Pay Accruals

Here’s a simple example of the month-end journal entry you might post in Xero:

• Scenario: Your Deeptech firm has a contractual policy that creates a £2,000 sick pay liability for the month based on unused, earned leave.
• Journal Entry:
  • Debit: Sick Pay Expense (an account on your Profit & Loss) for £2,000.
  • Credit: Accrued Sick Pay Liability (an account on your Balance Sheet) for £2,000.

This entry recognises the cost in the correct month, even though no cash has been paid out, giving a truer picture of your financial health.

Step 3: The Month-End Reconciliation Checklist for Sick Pay

The most common operational challenge is that your data on employee absence lives in disconnected systems. HR records may be in one platform, your payroll might be run in another, and your accounts are in Xero. This creates a high risk of error in your employee absence accounting.

A scenario we repeatedly see is the finance lead trying to reconcile the payroll journal in Xero with the actual payroll report, only to find the numbers do not match. This often happens because a last-minute sickness was recorded in the HR system but was not updated in time for the payroll run.

Implementing a simple month-end sanity check prevents these issues from escalating. The goal is a simple reconciliation to prove that all systems are telling the same story about your sick pay costs. What founders find actually works is a three-step check:

1. HR Report: Pull the employee absence report for the month from your HR system. This is your source of truth for who was off and for how long.
2. Payroll Report: Download the detailed payroll report. It should show a clear breakdown of payments, isolating any SSP and OSP amounts.
3. Accounting Ledger: Open your Profit & Loss in your accounting software and look at the gross wages and employer NI lines. The figures from your detailed payroll report should match the payroll journal posted to your accounts.

If the numbers do not align, investigate immediately. This discipline builds robust financial controls, which is critical for scaling and will be scrutinised during any future due diligence process.

Practical Takeaways: When Does Sick Pay Accounting *Really* Matter?

The level of rigour you apply to employee absence accounting should evolve with your startup’s stage. Over-engineering the process too early is a waste of resources, but leaving it too late creates a significant clean-up job before a fundraise.

• Pre-seed: Your entire focus should be on Step 1: Getting Payroll Right. At this stage, cash is king. Ensure every payslip is accurate, SSP is calculated correctly, and you are compliant with all statutory sick pay rules. Your accounting can be on a cash basis, and accruals are an unnecessary complication.
• Seed Stage: You should have mastered Step 1 and now be consistently implementing Step 3: The Month-End Sanity Check. This demonstrates financial discipline to early investors and starts building the operational muscle for more formal reporting. For an E-commerce startup with tight margins, understanding true, fully-loaded staff costs is critical for analysing profitability.
• Series A and Beyond: All three steps are essential. Step 2: Accruals become non-negotiable for producing accurate, FRS 102-compliant management accounts for your board and investors. A messy, unreconciled payroll and absence system is a red flag during due diligence. At this stage, your process for managing and accounting for sick pay needs to be robust, repeatable, and auditable.

Conclusion

Effectively managing sick pay in your UK startup is a journey of increasing sophistication. It begins with the fundamental mechanics of a correct payroll calculation, distinguishing SSP from your company’s own policy. It then progresses to building a disciplined month-end reconciliation process to ensure your HR, payroll, and accounting systems are aligned. Finally, as you scale, it involves adopting accrual accounting for more accurate financial reporting. Addressing sick pay with this structured approach is not just about compliance; it is about building a financially transparent and resilient organisation, ready for growth. Continue at the benefits accounting hub.

Frequently Asked Questions

Q: What is the difference between contractual and statutory sick pay?
A: Statutory Sick Pay (SSP) is the minimum amount UK employers must legally pay to eligible employees. Contractual or Occupational Sick Pay (OSP) is a more generous, company-specific policy where you might pay a full or partial salary. OSP is inclusive of any SSP entitlement, not paid in addition to it.

Q: Do we need to keep records of SSP payments?
A: Yes. UK payroll compliance requires you to keep records of all SSP payments for at least three years after the end of the relevant tax year. These records must show the dates an employee was off sick, the days they were paid SSP, and the total amount paid.

Q: Can UK startups reclaim SSP from HMRC?
A: No. The scheme that allowed employers to reclaim SSP from HMRC ended in 2014. Since then, businesses must cover the full cost of SSP themselves. This cost is a deductible business expense for corporation tax purposes, but it cannot be directly reclaimed.

Q: What makes a sick pay policy 'accumulating' for accrual purposes?
A: A sick pay policy is considered accumulating if employees earn an entitlement that can be carried forward and used in future periods. For example, if your policy allows employees to carry over five unused sick days into the next year, this creates a liability that must be accrued for under FRS 102.