An employee advance is money paid to a member of staff ahead of time: a float for a trip, cash to buy materials on site, or part of next month’s salary paid early. Until the employee either brings back receipts or earns the pay, the business has a claim against them. That claim belongs on the balance sheet, not in an expense account.
Two different kinds of advance
| Expense float | Salary advance | |
|---|---|---|
| Purpose | to pay business costs on the company’s behalf | to help the employee with personal cash flow |
| Settled by | receipts and an expense claim | deduction from future net pay |
| Account | Employee advances (current asset) | Employee advances or a separate “Salary advances” account |
| Payroll impact | none, if spent on business costs | the deduction appears on the payslip |
Keep one control account with a sub-ledger or tracking by employee, so you can see at any time who owes what.
Posting a travel float
A field engineer receives £400 before a week away. She returns receipts for £310 of hotel and meals (including £20 of reclaimable VAT on the hotel) and hands back £90.
| Account | Debit | Credit |
|---|---|---|
| Employee advances – J. Patel | £400 | |
| Bank | £400 |
When the claim is approved:
| Account | Debit | Credit |
|---|---|---|
| Travel and subsistence | £290 | |
| Input VAT | £20 | |
| Bank (cash returned) | £90 | |
| Employee advances – J. Patel | £400 |
The balance on her account is now nil. If she had spent more than the float, the excess would be paid to her through the normal expense claims process.
Recovering a salary advance
A salary advance is an asset when paid and is recovered from net pay. The payroll software records a post-tax deduction; the payroll journal then credits the advance account instead of net wages. Tax and National Insurance are still calculated on full gross pay in the month the salary is earned, because the advance is not extra pay. Get the employee’s written agreement to the deduction before making it: deductions from wages need contractual or written consent.
When an advance becomes a taxable loan
If advances to one employee, together with any other cheap or interest-free loans from the employer, total more than £10,000 at any point in the tax year, the loan is a taxable benefit in kind and must be reported (on a P11D, or payrolled if the employer has registered to payroll it). Below that level no benefit arises. Floats that are fully spent on business costs and settled promptly are not loans for this purpose, but a float that is never accounted for can turn into one, or into taxable earnings if it is written off. HMRC sets out the rules on taxable employment-related loans.
Keeping the account clean
- Approve every advance in writing and record the expected settlement date.
- Review the account monthly; anything older than one pay cycle should be chased.
- When an employee leaves, recover outstanding advances in the final pay if the contract allows, before the P45 is issued.
- Never write an advance off to an expense account without deciding whether it is taxable pay; a write-off is usually earnings and goes through payroll.
- At the year end the balance should be small and explainable name by name.
Directors are not employees in this sense when it comes to their own borrowings: money taken by a director belongs in the director’s loan account, which has its own tax rules.