28 October 2023
Salary advances are a common practice in the workplace, where employees can request to receive a portion of their salary before their regular pay day. These advances are usually interest-free and are repaid through payroll by a deduction from future net salary payments. They are generally not treated as loans, for which there are different income tax and National Insurance contributions (NICs) rules.
Current reporting rules
Under current legislation, these advance payments are treated as payments on account of earnings. This means that employers must submit additional real time information (RTI) reports to record them when they are processed, with the usual contractual salary payment also reported on the usual pay day. The current law governing RTI full payment submissions (FPS) says that an FPS must be submitted on or before each occasion when the employee is paid an amount of money. This is the date on which the employee is actually paid (so the date of the salary advance) – not their contractual pay date, which we understand is when many employers have been reporting such arrangements.
If an employer fails to submit payroll information on time, or submits an incorrect RTI return, they may be subject to penalties, the amount of which depends on the number of employees, and ranges from £100 to £400 per month. Late payment of tax and NICs following an RTI submission may also lead to interest charges. Interest rates on late payments of tax and NICs are linked to the Bank of England base rate. Payments more than six months late will also incur an additional penalty of 5% of the unpaid amount.
Our article Salary advances - what are the risks for employers? gives further details on what employers need to consider when making salary advances and, in particular, when using third party salary advance arrangements.
Proposed new approach
To address these issues, HMRC issued draft regulations in September 2023 amending secondary legislation so that salary advances no longer need to be separately reported before the employee’s contractual pay day. The proposed amendments will result in a requirement to only report the contractual salary payment in full, on the contractual pay day. This means each payment of salary only needs to be included on an RTI report once; a welcome simplification.
In conclusion, salary advances are an important aspect of how employers can help employees. The proposed changes in legislation will make it easier for employers to report these payments and reduce administrative burdens.
For more information, please get in touch with Susan Ball, Joe Pickering or your usual RSM contact.