Small employers thinking of using a salary advance scheme to support the financial wellbeing of their employees should be fully aware of how they work before using them, the Low Incomes Tax Reform Group (LITRG) is warning.
These schemes, which are also known as Earned Wage Access, are designed to give employees the option to get some of their monthly salary before payday and are usually run by a third party which advances the money to the employee. Then on payday, the employer reimburses the third-party through a regular payroll process, but the employer usually pays a fee for this service.
The scheme providers typically say there is no additional real-time information required for payroll returns, which while questionable according to the LITRG, is beneficial for both employers and employees, especially those on Universal Credit. New HMRC legislation has changed the reporting of salary advances to “regularise their position and give certainty that no additional RTI payroll returns are required”.
What are the risks of these schemes?
The implementation of the schemes is reasonably simple for employers, but there are risks for employees who use them. Often the employee also needs to pay a small fee to drawdown the cash, but if they make regular drawdowns, then these small amounts could become prohibitively expensive.
If these schemes are only used for emergencies, it would be less of an issue. But the International Labour Organisation, an agency of the United Nations, looked at how these services work around the world, and many employees are using them to meet daily expenses. It also describes some of the fees as ‘concerning’.
There are alternatives
If an employer wants to offer salary advance, they don’t need to employ a separate company to do so. There is no reason why a simple salary advance can’t be offered by the employer directly through the payroll.
It is also an option to change the payment periods to weekly rather than monthly, which could help employee cashflow. But it would be best to do this at the end of the tax year if you want to change this to avoid any possible penalties.
The other option is to provide a cheap or interest-free loan to help with a financial emergency, which could be tax efficient. You can find out more information about this at Gov.uk.
