HMRC give salary advance answer – but questions remain

In HMRC’s Agent Update 102, published on 16 November 2022,¹ HMRC said:

Salary advances are arrangements between an employer and an employee, allowing employees access to some of their earned salary before their normal payday. Employers may also make arrangements through a third party, the latter charging a small fee for their services.

Under current legislation, these advance payments are treated as a payment on account of earnings. This means that employers must submit additional RTI reports to record these advance payments.

However, HMRC recognises that the statutory position, if applied to salary advances, creates extra administrative burdens for both employers and HMRC because it would require them to submit additional RTI returns.

Additional returns may also impact on HMRC processes, such as the risk of PAYE coding or Universal credit errors.

To address these issues, HMRC will amend secondary legislation, so that salary advances can be reported on or before the employee’s contractual pay day. This means each payment of salary only needs to be included on an RTI report once.

Employers who are currently reporting salary advances on or before the contractual pay date may continue to do so until legislation is in place.

 ​LITRG have been raising questions directly with HMRC on salary advance schemes operated by third party businesses. This was due to our concerns that they were not compliant with current tax law. A summary of the points that have been raised with HMRC by LITRG can be found in the recent blog entitled ‘Salary advance serves up tricky conundrum for HMRC’.2 

Meredith McCammond, LITRG Technical Officer, said:

“On 16 November 2022, HMRC outlined their ‘view’ of salary advance schemes in an Agent Update, their publication containing guidance for agents such as accountants and other advisers. The medium of the message is unusual and it is important that HMRC also communicate the message to key stakeholders outside the agent community, in particular employers who potentially face a liability risk - until HMRC confirm otherwise.

“What HMRC have said in the Agent Update means that there has been widespread PAYE non-compliance for many years – and certainly since 2018 when these third-party schemes started to take off. Given the importance attached by HMRC to the concept of ‘on or before’ in RTI (HMRC’s ‘Real Time Information’ system³) and the fact there have been compliance activities in respect of RTI, it is surprising that there has not been earlier intervention from HMRC on this issue. The difficulties of dealing with the issue now have increased as they have become more widespread.

“Now that HMRC have confirmed that there will be a legislative solution, we will want to study the legislation carefully to check what exactly they are proposing. As our blog makes clear, we hope that any amendments that are made to secondary legislation will ensure that it is also possible for employers to offer their employees this access to funds directly, without being compelled to resort to using a third-party provider who will charge the employees a fee.

“This is potentially a significant change to RTI reporting requirements. Depending on the legislation, the changes also may raise the question of whether it is fair that employers who pay weekly and file their RTI submissions at the correct time, should be at risk of making an inadvertent mistake and incurring a penalty four times more often than an employer who pays monthly and then uses a salary advance scheme. We would urge HMRC to consult with stakeholders on any changes to legislation to ensure the legislation avoids further complexities, anomalies or unintended consequences as a result of trying to deal with this issue.”

Notes for editors

1. See Agent Update here.
2. See blog here.
3. Under the ‘Real Time Information’ (RTI) system, most employers have to send PAYE information to HMRC online, on or before their employees' pay day (be that weekly, monthly or otherwise). In other words, the information must be reported in ‘real time’.