Advance of salary letter

Paying an employee a salary advance is something you probably discourage. However, you may need to do this from time to time, particularly with new starters. What documentation will you need to ensure your business can automatically recover it from the employee’s regular pay?

Rate per day

If an employee joined your company halfway through the month but just after you processed the payroll, your usual policy might be to make that new employee wait up to six weeks for their first salary. However, if the employee asks if you can pay them at the end of this month for the days they have worked already, you could pay them an advance.

You’ll need to work out a rate of pay per day for the employee. For a five-day working week, use 260 days per year (if it was a six-day week, then it would be 312 (6 x 52)). The gross rate of pay per day is then annual salary/260.

You will need to deduct tax and NI from the gross pay. A quick way to work out the after-tax and NI amount for a basic rate taxpayer is to take 69% of the gross (tax at 20% and NI at 12% = 32%). Don't bother to fiddle about with tax-free pay, leave this as a bonus to the employee in next month's net pay. For a higher rate taxpayer you use 58% (tax at 40% and NI at 2% = 42%).

You should post the bank payment against a balance sheet control account such as “Staff loans and advances” within the debtors section of the accounts. For example, on Sage, code 1105 would be appropriate.

On next month’s payroll, in addition to the employee’s basic salary, you have to add on the gross amount they were due for their first two weeks. You then claw back the net amount you already paid to them as a deduction from net salary.

In order to balance your books, when you come to post the payroll summary for that month to your nominal ledger, code up the deduction as a credit to the “Staff loans and advances” code. In addition to your standard payroll journal, the journal would be: Dr Net wages control account and Cr Staff loans and advances.

Recovery letter

You can’t recover the advance from your employee’s pay unless they have agreed to it up front. Issue an Advance of Salary Letter, the first part of which sets out the terms of the advance and how this sum has been calculated. The second part is a sign-off by the employee agreeing to the recovery of the advance as a deduction from their net salary. Get the employee to sign this and then keep it in their personnel file.