HM Revenue and Customs has, as part of the February 2023 Employer Bulletin, confirmed a concession on PAYE responsibilities for pay advances.
Where there are arrangements between an employer and an employee, allowing employees access to some of their earned wages or salary before the normal pay day, or make similar arrangements through a third party, these arrangements are commonly referred to as salary advances.
Where other forms of salary advance exist, including long-term advances, often made for specific purposes such as the purchase of a bicycle, season tickets or moving expenses. These are not considered payments on account of earnings, so fall outside the scope.
On 16th November 2022, HMRC announced its view on the proper reporting of these salary advances in Agent Update 102.
To summarise, under current legislation such advance payments are treated as a payment on account of earnings. The result is, employers must submit an additional Full Payment Submission (FPS) to record these advance payments.
HMRC now recognises that the statutory position, if applied to salary advances, creates extra administrative burden on both employers and HMRC, due to the requirement of on or before FPS requirements. Additional returns potentially increase the risk of PAYE coding or Universal Credit errors, inconveniencing employees.
To address these issues, HMRC propose to amend secondary legislation, so that salary advances can be reported on or before the employee’s normal contractual pay day. This means each payment of the full salary only needs to be included on an FPS once.
Employers who are currently reporting salary advances on or before the contractual pay date may continue to do so until new legislation is in place.
Further information, including plans to update guidance, will appear in future editions of the Employer Bulletin.
A number of salary advances solution have popped up over the past few years. They are increasingly promoting themselves as financial well being solutions although many apply charges for drawing down small amounts of earned wage advances. Although promoted as low cost, the comparative equivalent interest charge can remain high.
For example, a £1.75 charge on a 3 day advance of £50 works out as an equivalent of annual interest of 426%.
The origins of Real Time Information was to support the introduction of Universal Credit by giving accurate verifiable income data. The principle of the legal requirement of ‘on or before’ was born alongside the introduction of verified pay,ents with the use of the BACS Hash.
April 2023 sees the demolition of some of those original principles with the removal of the hash, and now the removal of some aspects of the on or before principle.
Will employees really be able to choose the day they are paid? Are these pay on demand?
The reality is that they are short term unregulated credit, an advance of future potential earnings on the basis of time already worked.
There have been so many fudge workaround application of RTI that cannot be adequately handled by the 11 to 12 year old technology, that employers have had to fiddle with payment dates to not upset UC claims, that maybe the whole system of verifying income and reporting may be due review. Originally denied that regularly monthly reporting was appropriate, that now seems to be the direction of travel.
What would be good is to see a future of real pay on demand – really choose your pay day, and with no fees. Maybe the return of weekly to now be daily payroll.
And what about National Minimum Wage?
So if these advances are legally wages, what happens in relation to National Minimum Wage which operates in strict pay period and timing of payment basis and, does charging the fee, which is an employer arrangement, a deduction for the benefit of the employer which reduces NMW pay?