Should small businesses offer a salary advance scheme?
3-minute read
Employers may be wondering how they can support their people as the cost of living soars and incomes are squeezed.
And with big firms like Tesco advertising a salary advance as an alternative to high-cost debts, this might sound like something you want to offer your staff.
But what is a salary advance?
Giving your staff access to their salary early can be helpful for managing unexpected costs, but it needs careful consideration.
Here, we explore how salary advance schemes work, and the risks and benefits of setting one up for your small business.
What is a salary advance?
A salary advance is a way for employees to get some of their earned salary early.
Employers have an agreement with a third-party provider that can give people a short-term loan before their next payday – this is known as an Employer Salary Advance Scheme (ESAS).
Each transaction usually comes with a £1 to £2 fee, which comes out of the employee’s next paycheque.
These schemes are designed to cover unexpected costs before the next pay day, but their popularity increased during the pandemic as people looked for ways to manage their finances.
How does salary advance work?
If you want to offer a salary advance scheme then you'll need to set up an agreement with a provider, such as Salary Finance or Revolut.
There’s no cost to you as a business, but employees usually have to pay between £1 and £2 each time they draw down their wages.
The table below shows how a salary advance scheme would work for your business and your employees.
Your business | Your employees |
|---|---|
Register with an independent ESAS provider to offer a scheme to staff | Sign into the service (often managed through an app or online) to view how much of their salary they can access early |
Pay the employee’s salary balance (minus any transaction fees for using the scheme) on the normal payday | Choose how much of their earned salary they want to be paid in advance – this is usually capped at 50 per cent* |
*Earned salary (or earned wage) is the pay they're owed for days already worked in that week or month before payday.
Risks and benefits of using a salary advance scheme
Here are some of the risks that come with salary advance schemes:
- they aren’t regulated in the same way as other loans and borrowing so credit checks don’t apply – this means affordability is down to the person using it and can lead to financial difficulty
- the fixed transfer fee makes it difficult to compare the cost with interest on a loan
- they aren’t designed for regular use – frequently using salary advance could lead to people running out of money between paycheques
The Financial Conduct Authority (FCA) has said: “The FCA does not usually regulate ESAS as an early advance of salary provided by an employer does not involve the provision of credit, but they can raise similar issues.”
Read the FCA’s statement to understand more.
That said, these schemes can be useful for people who need to pay for something in the short-term. For example, if their boiler breaks and they need to cover the cost of a new one before the next payday.
These advance salary schemes can be a more affordable alternative to payday loans and credit cards.
As an employer and small business owner, make sure you:
- inform your staff about the potential risks of using the scheme
- watch out for underlying financial problems – signpost staff to financial support and charities like Citizens Advice if you’re worried they’re struggling
- pay your staff fairly so that staff aren’t using the scheme to make up for poor wages
Meanwhile, HR magazine People Management has interesting insight from professionals in the field if you want to learn more about the pros and cons of offering a salary advance scheme.
Alternative ways to reward your staff
Offering a good benefits package is one of the best ways to keep staff motivated – and attract new people to join your team if you’re hiring.
You could consider:
- offering flexible working
- developing a reward scheme
- focusing on employee retention and career development
More guides for employers and small businesses
This article is intended as a guide. If there’s anything you’re unsure about, make sure you get advice from a finance professional. Money Helper has advice and resources to help with managing finances.
Do you offer a salary advance scheme in your business? Let us know your experience in the comments.
Ready to set up your cover?
As one of the UK's biggest business insurance providers, we specialise in public liability insurance and protect more trades than anybody else. Why not take a look now and build a quick, tailored quote?
Start your quote
Written by
Catriona Smith
Catriona Smith is a content and marketing professional with 12 years’ experience across the financial services, higher education, and insurance sectors. She’s also a trained NCTJ Gold Standard journalist. As a Senior Copywriter at Simply Business, Catriona has in-depth knowledge of small business concerns and specialises in tax, marketing, and business operations. Catriona lives in the seaside city of Brighton where she’s also a freelance yoga teacher.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
Keep up to date with Simply Business. Subscribe to our monthly newsletter and follow us on social media.
Subscribe to our newsletterInsurance
Public liability insuranceBusiness insuranceProfessional indemnity insuranceEmployers liability insuranceLandlord insuranceTradesman insuranceSelf-employed insuranceRestaurant insuranceCommercial van insuranceInsurersAbout
About usOur teamAwardsPress releasesPartners & affiliatesOur charitable workModern Slavery ActSection 172 statementSocial mediaSite mapAddress
6th Floor99 Gresham StreetLondonEC2V 7NG
Sol House29 St Katherine's StreetNorthamptonNN1 2QZ
© Copyright 2023 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.