Salary advance: a guide for employers

What does salary advance mean?

No matter how well you budget, surprise expenses always crop up. Especially in challenging economic times like these. That's why employers are exploring salary advance schemes that provide early earned wage access to help their people manage emergency costs.

In the UK, a salary advance lets employees access a portion of their earned salary before it’s due to be paid. Salary advances can be helpful if employees face an unexpected cost or emergency, and need funds earlier than their payday.

What is the difference between a salary advance and a loan?

From a distance, salary advances in payroll and payday loans might seem the same: access to funds at short notice.

In reality, there are several key differences between the two:

1. Repayment

Salary Advance

The employee is agreeing to receive a portion of earned wages earlier, reducing the value received later within the period on pay date.

Loan

The loan term is usually an agreed-upon period that spans several pay cycles and is based on future earnings.

2. Amount

Salary Advance

A salary advance is usually a smaller amount of money than a loan, based on a portion of the employee’s regular salary. Employees can only access the money they've already earned.

Loan

Loans are borrowed from a loan provider or bank. The amount is based on factors such as credit history and income.

3. Interest and fees

Salary Advance

There’s no interest to pay on salary advances, since these schemes aren't classed as credit. Employees are usually charged every time they withdraw funds though – typically £1-£2 per withdrawal.

Loan

Loans are subject to variable interest rates, and the borrowing period is typically longer than a single pay period.

4. Eligibility

Salary Advance

To access a salary advance, individuals will need to be employed with a steady source of income with an employer supporting this service.

Loan

To be eligible for a loan, individuals will need a good credit score and history, and meet the lender’s income requirements.

5. Purpose

Salary Advance

A salary advance provides fast access to funds for employees in a pinch. Employees essentially access funds from their current payslips, instead of borrowing from a finance provider or bank.

Loan

A loan can be used for many purposes – from home improvements to starting a business. An individual borrows from a bank or loan provider, instead of drawing from their earned salary.

How does salary advance work?

The key thing to remember is that your employees can only access a salary advance if you have a scheme in place. A salary advance service provider will typically have a portal or app that your employees can use to see how much of their salary they can withdraw.

Here’s how salary advances in the UK work:

Registration

Once you’ve selected your salary advance provider, employees will need to register for the service to access the app or online portal.

Access

Employees can see how much of their wage they can access early in the online portal or app. Then they can withdraw their desired amount. Most providers give access to between 50%-60% of an employee’s earned wage.

Repayment

The employee's advance amount will be automatically deducted from their next pay packet, and forwarded to the salary advance provider. This includes withdrawal fees. Providers often have a limit on how many withdrawals an employee can make in one working month.

Fees

The fees charged on a salary advance vary depending on the provider, so make sure you do your research and find a scheme that delivers value for you and your team.

Note: Salary advance schemes aren’t necessarily more cost-effective than conventional forms of credit. Sometimes withdrawal fees are typically higher than those charged on more traditional loans.

Salary advance in the UK

You might be curious about the laws and regulations surrounding salary advances in the UK.

Since the FCA doesn't class salary advances as credit, they're not an FCA-regulated lending product. The same applies to the Consumer Credit Act 1974, which governs the terms and conditions of UK consumer credit agreements. Since salary advances aren’t considered a form of credit, they're not subject to this act.

The Data Protection Act 2018

Salary advance companies handle sensitive financial information, so you’ll be pleased to hear that providers come under the Data Protection Act 2018. Salary advance providers must follow the data protection principles outlined on the gov.uk website.

Is salary advance taxable?

Yes. Salary advances are subject to Income Tax and National Insurance, and must be reported via the PAYE system on or before the payment date. This will likely mean you'll need to send additional Real Time Information (RTI) payroll returns to HMRC.

Keeping accurate and up-to-date records of all salary advances will help you properly report income to HMRC. Failure to do this could result in penalties.

In a recent bulletin, HMRC indicated that they would update legislation around reporting salary advances, but this is yet to be announced.

Salary advance: considerations for employers

Not all employers have the cash flow or resources to offer salary advances, so think carefully before committing to a scheme.

Benefits and drawbacks of offering salary advances to employees:

To help you decide whether a salary advance scheme could work for your business, check out this table of benefits and drawbacks.

Benefits

• Improved employee morale: Providing employees with access to a portion of their earned salary early can boost morale and show them that you recognise their needs.
• Increased productivity: Money worries can feel overwhelming, making it much harder to concentrate on anything else. By helping employees manage their financial needs, you could improve their focus and productivity.
• Reduced financial stress: Salary advances give employees more agency over their finances. This can reduce the stress and anxiety of unexpected expenses or emergencies.
• Improved retention: Offering a salary advance demonstrates that you value your employees' needs and seek out additional ways to provide support. This could help to improve retention by making your team feel better supported.
• Greater autonomy: Most employees receive their salary monthly, but this doesn’t always reflect how we spend money. Salary advances give your people more autonomy over how, when, and how much they spend during the month.

Drawbacks

• Increased administrative burden: Salary advances can have multiple tax and resource implications, depending on how and when they’re issued. These schemes often require extra resources, such as payroll systems and staff.
• Increased liability: By providing salary advances, you are taking on additional financial responsibility for your employees. This can be risky if the employee leaves the company and their advance is not fully reconciled.
• Reduced cash flow: Providing employees with salary advances can limit your available cash flow since you pay them through the scheme ahead of schedule.
• Complex tax implications: Salary advances can have complex tax implications. You may need to consult with a tax professional to ensure compliance with all relevant regulations.
• Data protection: If you’re working with a salary advance provider, you’ll need to share highly sensitive employee data with them. This must be done safely and securely – a breach could be heavily penalised.

How to decide whether offering salary advances is the right choice for your business

Salary advance schemes are growing in popularity, but that doesn’t always mean they'll work for your business.

Here are some signs you’re ready to offer a salary advance scheme to your team:

• Your business is stable and you have cash reserves
• You have checks and balances in place
• You won’t be putting positive cash flow at significant risk
• Your finances are in order – which comes easily if you’re already using Xero

Want more tips and support with running a healthy business? Check out our cash flow support hub today.