Xero Payroll Settings – How to Add a Deductions Pay Item

by | Apr 20, 2018

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When paying your employees through Xero payroll, you may need to apply some deductions to their payments. This is done by using Deductions pay items. In this tutorial, we will set up a deduction pay item in Xero’s demo company.

Pay Items in Xero’s Payroll Settings

To add a deduction pay item, first go to the Pay Items tab of the payroll settings area:

  1. Go to Settings → Payroll in the main menu.
  2. Click on the Pay Items tab.


How to Add a Deductions Pay Item

On the Pay Items tab, you should see a number of pay items that have already been set up in the demo company. In the exercise, we will add a new Deduction pay item called “Professional Fees”. To do this:

  • Select Deductions on the left-hand side.
  • Click on the Add button on the right-hand side.
  • Click on None in the drop-down list.


A pop-up box will appear for you to enter the details of the new pay item. For this exercise, we will keep it simple and not fill in every detail. If you are creating pay items for your business instead of the demo company, please ensure you complete the various fields and options in line with government regulations.

To finish creating the pay item for this tutorial, complete the fields in the pop-up box as follows:

  • Deduction Name: type in Professional Fees.
  • Account: select 850: Suspense from the list.
  • Tick Boxes: leave them un-ticked.


Click on the Add button when finished. You should now see Professional Fees in the list of Deductions pay items.


Mark Cunningham

Mark Cunningham

Xero Specialist | Udemy Instructor | Small Business Owner

I have been a company accountant for more than 20 years. I am now dedicated to empowering small business owners through my highly-rated and popular Udemy courses on Xero, bookkeeping and accounting.

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