How to manage salary advances on your payroll
Salary advances, essentially a pre-payment of wages, can be a valuable tool for employees facing unexpected financial challenges.
However, while in theory, it seems a quite straightforward process to pay an employee early, businesses need to understand how to report these advances correctly to avoid any mishaps and ensure compliance with HM Revenue & Customs (HMRC) regulations.
What constitutes a salary advance?
A salary advance is an early payment of wages to an employee before their regular payday. It is not a loan or a bonus but rather a pre-payment of their regular wages.
Record the advance in your payroll system
When an employee receives a salary advance, it should be recorded in the payroll system. This ensures that the advance is accounted for when calculating the employee’s total earnings for the tax year.
The payroll system should have a dedicated field or category for salary advances to differentiate them from regular wages.
Deduct the advance from future wages
Once an advance has been given, it should be deducted from the employee’s future wages. This ensures that the employee doesn’t receive a double payment.
The deduction can be made in one lump sum or spread over several pay periods, depending on the agreement between the employer and the employee.
Report the advance on the Full Payment Submission (FPS)
For HMRC reporting purposes, the salary advance should be included in the FPS for the period in which the advance was made. The FPS provides HMRC with real-time information about employees’ pay and deductions. By including the salary advance in the FPS, you’re ensuring that the correct tax and National Insurance contributions (NICs) are calculated.
Ensure proper taxation
Since the salary advance is a pre-payment of wages, it should be treated like any other wage payment. This means that the usual Pay As You Earn (PAYE) tax and NI deductions apply.
Maintain clear communication with employees
Employees should clearly understand the terms of the advance, including when and how it will be deducted from their future wages.
Providing written documentation of the advance agreement can help avoid misunderstandings and disputes down the line.
Regularly review and update your policies
As with all aspects of business operations, it’s essential to regularly review and update your policies regarding salary advances. This ensures that you remain compliant with any changes in HMRC regulations.
Salary advances can be a valuable tool for supporting employees in times of need. By following the steps outlined above and staying informed about HMRC regulations, businesses can successfully issue salary advances while maintaining compliance and trust with their employees.
If you would like more information about payroll management for salary advances, our payroll team at Moore Thompson are here to help. Contact us today.