Before you start (quick checks)
Confirm you are using Penfold as your provider, you’ll set the pension up under Workplace Pensions and select Salary Sacrifice as the tax relief method.
Decide whether you will:
Option A: Record the sacrificed amount as employer contributions (Xero will treat contributions as Employer when Salary Sacrifice is used), or
Option B: Show both employee deduction (sacrifice) and employer contribution separately (create separate pay items).
1) Create the Salary sacrifice deduction pay item
In Xero go to Payroll → Payroll settings → Pay Items → Deductions → Add and choose Salary sacrifice.
Fill the deduction fields (use your spreadsheet guidance for the recommended values):
Calculation type - Gross % if the contribution is a percentage of gross pay; choose Fixed if it’s a fixed amount.
Percentage / Standard amount - set the default % or amount only if all employees will use the same amount; the spreadsheet recommends leaving this blank unless uniform.
Liability account - e.g. 858: pensions payable (or your company’s designated pensions liability code).
Calculate on qualifying earnings - tick only if you intend to calculate the deduction on qualifying earnings (match your scheme’s qualifying earnings rules).
Reduce pensionable earnings - do not tick this for typical salary sacrifice pension deductions.
Is a pension scheme deduction - must tick (important to mark the deduction as a pension-type).
3. Save the deduction pay item.
2) Add/configure the workplace pension scheme
In Xero go to Payroll → Payroll settings → Workplace pensions → Add workplace pension.
When setting a provider, type “Penfold” and choose Set up manually (or select your provider if available).
Configure scheme defaults:
Start date / Staging date - enter the company's AE staging/duties date.
Employer and employee contribution defaults - set the default employer% and employee% if you want them pre-filled. If you’re using Salary Sacrifice and want the sacrificed amount treated as employer contributions, ensure that Tax Relief is set to Salary Sacrifice.
Qualifying earnings - choose the pensionable earnings definition (statutory or alternative) that matches your scheme.
3) Decide how to show employer vs employee contribution
Your spreadsheet gives two common setups - pick the one that matches payroll/pension policy:
Option 1 - Treat sacrificed amounts as Employer contributions (recommended for simplicity):
Configure the pension scheme so that the tax relief method = Salary Sacrifice. Xero/Penfold will treat sacrifices as employer-paid for payroll records. Set the employer contribution default appropriately (i.e., employer % = employer base + sacrificed amount where required).
Option 2 - Show employee and employer contributions separately:
Keep the employee salary sacrifice deduction visible on payslips (employee deduction pay item) AND create a separate employer pension pay item (or rely on the scheme employer %) to show the employer contribution. This provides explicit payslip visibility for both lines (spreadsheet contains examples). (Xero Central)
4) Add the deduction/pay item to each employee
For each employee: Payroll → Employees → [Employee name] → Payroll (or Employee payroll template).
Add the Salary sacrifice deduction pay item created in Step 1. Enter either the % or the fixed amount for that employee.
Confirm the employee’s pension scheme selection (Workplace pension tab) - the employee should be linked to the scheme you added in Step 2.
5) Run a test pay run and check payslips
Run a test pay run for one employee first. Verify the payslip shows:
Reduced gross salary (employee salary reflected after the sacrifice).
The Salary sacrifice deduction line (if using Option 2) or the employer-style pension entry (if you used Option 1).
Employer pension contribution line (if you show it).
Compare with the demo payslips you noted in your spreadsheet (you referenced example setups to confirm the three different scenarios). If numbers look right, proceed to full run.
6) File pension schedules/send contributions to the provider
After posting payroll and submitting RTI to HMRC:
Export / upload the pension contribution schedules to your pension provider. For Penfold, there’s a small guide on how to send schedules; ensure the contribution amounts are mapped as employer amounts when Salary Sacrifice is selected.
Reconcile the pension liability account (the liability account you selected when creating the deduction) when you make provider payments.
7) Reconciliations & reporting checks
Check the pension liability account and bank payments each pay run.
Confirm the contributions are appearing under Employer on the provider upload when Salary Sacrifice is enabled.
If you intend to share Employer NIC savings with employees (e.g., boost pension), document that policy and configure employer contribution values accordingly - your spreadsheet mentions this as an optional next step.
Quick troubleshooting / common pitfalls
Salary Sacrifice pay item not visible - confirm you added it under Deductions → Add → Salary Sacrifice.
Wrong amounts on payslip - check whether the calculation type is % vs fixed and whether the employee record overrides the default %. Spreadsheet suggests leaving the default blank and setting per-employee where contributions vary.
Pension scheme mapping — ensure the employee is assigned to the correct workplace pension; Xero can auto-create some pay items when a scheme is added, but verify all mappings.