Salary advance schemes: Key issues for small employers
As more small employers take an interest in the financial wellbeing of their employees, we are aware that ‘solutions’ such as salary advance schemes are being heavily marketed. While they can sometimes provide helpful support to employees, employers need to be aware of the details before deciding to implement them.
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Whilst salary advance schemes are gaining popularity it is really important to research the position thoroughly and not just accept what you are told by those promoting the schemes. This article highlights key considerations for small employers regarding salary advance schemes, to give you a starting point for your further research.
Salary advance schemes
Salary advance schemes – sometimes called Earned Wage Access (EWA) provide employees with the option to receive a portion of their monthly salary before their regular payday, to help manage unexpected expenses or cash flow shortfalls. While there are different ways to set up these schemes, they typically involve a third-party provider. In most cases, the provider advances the funds to the employee from their own resources. Then, on payday, the employer reimburses the provider through the regular payroll process. The provider usually charges the employer and employee a fee for this service.
We look in detail at how salary advance schemes work in our blog.
Payroll position
In terms of the payroll position, and as set out in the blog, historically, the schemes have been sold by the third-party providers as requiring no additional real time information (RTI) payroll returns. Although this view was technically questionable, this approach was beneficial for both employers and employees, particularly for employees on universal credit. This is because universal credit is based on how much employees earn and when they are paid - smooth payroll returns help to maintain consistent benefit payments. Recently, HMRC have updated legislation around reporting salary advances to regularise their position and give certainty that no additional RTI payroll returns are required.
Risks
While the idea of implementing a salary advance scheme may seem straightforward for employers, there are risks for employees. For instance, although the employee fee for each transaction is small, repeated drawdowns can lead to them mounting up. Indeed recent research by the International Labour Organisation (an agency of the United Nations) which looked at EWA services in different countries, suggests that many employees use them regularly to meet daily needs rather than for emergencies, and that the fee levels of some providers are ‘concerning’. The schemes are also not regulated – although under an initiative of the Chartered Institute of Payroll Professionals (CIPP), some of the providers in the market have now signed up to an EWA code of practice.
Alternatives
Bear in mind that there may be alternative or additional options which may meet the needs of employees. For example:
- it is perfectly acceptable for employers to make salary advances themselves - without using a third-party salary advance scheme. This could save you both fees.
- a cheap or interest free loan could be a tax efficient alternative of helping employees to deal with a financial emergency. More information for employers on the tax treatment of beneficial loans can be found on GOV.UK.
- offering weekly rather than monthly pay periods may better match work done with an employee’s cash flow needs. However changing pay periods, particularly in-year, may be complex for employers and weekly reporting can increase admin, costs and exposure to RTI penalties.
Final thoughts
You may wish to take advice on the options that are available. A tax adviser specialising in employment taxes should be able to help you here, and you can find guidance to help you reach one in our getting help section.
Given these schemes are used by employees who may be on low pay, it is also important to consider the universal credit interactions. For instance, benefits in kind like cheap or interest free loans are not currently treated as income for universal credit, but weekly pay periods can clash with the monthly assessment periods leading to fluctuating awards.
You can read more about salary advance schemes and other potential cost of living support measures in our guidance for small employers.
We will explore another type of employee financial wellbeing scheme – a grocery salary sacrifice - in a forthcoming blog. Do check back for updates.
