Salary advance: key info for employers

A salary advance is a flexible approach to paying your employees. It involves providing them with access to a portion of their earned wages before payday. This not only gives them greater control over their finances, but also has the potential to boost your company’s retention rate and reputation.

Before you implement a salary advance scheme, however, it’s important that you understand all the legal, administrative, and practical implications involved. Here, we outline the points you need to consider, the pros and cons, and how to introduce one in practice.

What is a salary advance?

So, what does salary advance mean exactly?

A salary advance is a financial arrangement that allows employees to access a portion of their earned wages before their regular payday. It’s not a loan. Instead, it’s an early payment of money your employee has already earned but hasn’t yet received.

For employers, this works by releasing a part of your employee’s accrued wages ahead of your scheduled payday. For example, if your employee has worked for two weeks of a month-long pay period, they might request access to those two weeks of earnings rather than waiting for the full month to wrap up.

How does salary advance work?

The process typically works in one of three ways:

1. Direct employer advances: As the employer, you manage the process internally, adjusting your payroll systems to release funds early and reconciling the amount during your regular pay cycle.
   
   
2. Third-party platforms: Many UK businesses partner with specialised salary advance providers who manage the administration and often the funding, too. These platforms track worked hours and allow employees to withdraw a percentage of their earned wages as and when required.
   
   
3. Salary advance apps: Increasingly, employees can also link their work details to an app that facilitates early access to wages, often with minimal employer involvement beyond the initial setup.

Most arrangements have limits in place, typically allowing employees to access between 30 and 50% of their earned wages in advance. This helps to ensure that your employees receive a meaningful amount both upfront and on their regular payday.

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Can employers legally offer salary advances to employees?

Yes, if your business operates in the UK, you can legally offer salary advances to your employees. There’s no legislation that prevents this, and many companies are now incorporating it as a valuable employee benefit.

However, there are several important legal considerations to bear in mind:

• Employment contracts: Your salary advance arrangement should be clearly documented. You may need to update your employment contracts or create a separate salary advance policy that outlines your company’s terms and conditions.
• Employment rights: It’s important that salary advances are offered fairly and consistently to avoid any claims of discrimination. Again, having a written policy in place will help to ensure all your employees are treated equally.
• Tax implications: Salary advances aren’t considered additional income — they’re simply early payments of wages that would be paid anyway. The usual PAYE tax and National Insurance (NI) contributions apply when the work is completed, not when the wages are advanced. We’ll explore this in more detail in a moment.
• Consumer credit regulations: If you’re charging interest or fees on advances, you’ll need to be careful. This could potentially bring the arrangement under the Consumer Credit Act 1974, which might require your business to be authorised by the Financial Conduct Authority (FCA). This is unusual, though. Most straightforward salary advances that simply provide early access to earned wages without additional charges avoid this requirement.
• Data protection: Bear in mind that if you’re using a third-party provider to facilitate your salary advances, they have to comply with UK GDPR requirements for handling your employees’ financial data.

Many employers find that offering salary advances through a reputable third-party platform helps to navigate these legal complexities. External providers have typically addressed the regulatory requirements upfront.

What are the tax implications of offering salary advances?

Let’s look into the ways in which salary advances affect how your company manages tax, although you might be pleased to hear that the implications are relatively straightforward.

Since an advance is simply early access to wages already earned, it doesn’t change the total amount paid to employees or alter their tax position.

For PAYE and NI purposes, the advance is treated as part of the employee’s normal salary when it’s eventually processed through payroll. The timing of the advance doesn’t affect when tax becomes due — tax and NI contributions are calculated and deducted at the normal payroll date, based on your employee’s total earnings for that period.

If you’re using a third-party provider, the process typically works behind the scenes with your payroll system, automatically reconciling advances when processing the regular payroll. This ensures that the correct tax calculations are maintained regardless of when employees access their wages.

The only potential complexity occurs if an advance crosses tax years. In these rare cases, you’ll need to ensure the advance is attributed to the correct tax year in which the work was performed, not when the money was paid.

What are the benefits and risks of salary advances for employers?

Ok, now onto the pros and cons. What are the biggest benefits to be aware of when it comes to implementing a salary advance scheme? What is the best reason for salary advance?  And what are the risks?

Benefits

• Improved retention rates: Companies that offer salary advances typically see lower turnover rates. When employees feel supported during financial challenges, they’re more likely to remain loyal to your business.
• Enhanced employee well-being: Providing access to earned wages can significantly reduce your employees’ financial stress. This can translate to improved focus, productivity, and job satisfaction.
• Competitive recruitment advantage: With more job seekers prioritising workplace benefits, a salary advance scheme can help you to attract top talent. Younger employees are likely to be drawn to this benefit in particular.
• Minimal cost to implement: Salary advance schemes typically don’t require a lot of upfront investment.

Risks

• Cash flow considerations: If many employees request advances simultaneously, this could potentially affect your company’s cash flow. Be aware if you’re a smaller business with limited financial reserves.
• Dependency concerns: Some employees might become reliant on advances, potentially masking deeper financial issues that could eventually affect their work.
• Implementation challenges: Rolling out a new financial benefit requires careful planning and communication. Implementing it poorly could lead to confusion, accusations of bias or discrimination, or administrative headaches. If there isn’t sufficient oversight, you might even be in breach of financial regulations.
• Administrative complexities: If you choose to manage your scheme internally, this can create additional work for your payroll and HR teams. This may prove taxing if your systems aren’t properly equipped to handle flexible payment schedules.

How do I implement a salary advance scheme in my company?

There are several steps involved in implementing a salary advance scheme in your company. Here’s how to get started:

Step 1: Choose your approach

Decide whether you’ll manage advances in-house or partner with a third-party provider. In-house management gives you more control but requires the right administrative resources. Third-party providers handle most of the logistics but come with service fees.

Step 2: Develop a clear policy

Create a written policy that outlines:

• Eligibility requirements (many companies include a minimum employment period)
• Maximum advance amounts, typically 30 to 50% of earned wages
• Frequency of advances allowed
• Application and approval process
• How advances will be reconciled at regular paydays

Step 3: Update your systems

Ensure your payroll system can accommodate advances and track reconciliations accurately. This might require software updates or new processes for your payroll team. If you’re opting to go with a third-party provider, do your due diligence beforehand.

Step 4: Communicate with employees

Introduce the scheme through multiple channels:

• Team meetings and company-wide announcements
• Updates to employee handbooks
• Information sessions explaining the benefits and process
• Clear instructions on how to request advances

Step 5: Start with a pilot

Consider testing the scheme with a small department before rolling it out across your company. This will help you to identify and address any issues.

Step 6: Monitor and evaluate

Once implemented, regularly review your scheme’s usage patterns, the administrative burden it’s caused, and the extent to which it’s affecting your cash flow. You might also want to request employee feedback, or run surveys to see whether it’s improved your retention rates and your reputation in the market.

Quickfire summary

Salary advances allow employees to access wages they’ve already earned before the regular payday. As a UK employer, you can legally offer this benefit either directly through your company or via a third-party provider. The benefits include improved employee well-being, reduced absenteeism, and better retention, while the risks include administrative complexity and potential cash flow challenges.

Implementing a salary advance scheme is relatively easy, and involves creating a clear policy, updating your payroll systems or finding a provider to partner with, and communicating the process to your staff. When properly implemented, salary advances can be a valuable addition to your employee benefits package, often without a major financial hit.

Also read:

• Small business grants to be aware of in the UK
• New legislation impacting your business
• What is Making Tax Digital in the UK?
• Read more business insurance guides