Could payroll loans replace payday lenders?

Around 300,000 people a month take out high cost short-term credit in the UK. 1.6 million people in the UK had high cost credit debt at the end of 2016, with the average loan of £300. The Financial Conduct Authority (FCA) reported that 1 in 8 of these borrowers were in arrears. It can be important for employers to recognise that assisting employees in gaining better financial awareness can help them avoid financial hardship. 

Are there restrictions on offering loans to employees?

Some employers have concerns over offering loans to employees as this practice can throw up some unexpected pitfalls. Generally, an employer can make a loan to an employee for any purpose, leading low cost or interest-free loans to be commonly offered as an employee benefit. For example, employee loans for season tickets are frequently made. Employers should be careful to consider whether the loan should be less than £10,000 as otherwise the loan will be a taxable benefit in kind and be subject to national insurance contributions. 

Do the benefits really pay off for employees?

A recent press release from the CoOp detailed how UK workers could save more than £250m a year in interest rate charges if employers introduced a payroll loan scheme like theirs. Personal debt issues can lead to stress and negatively impact home and working life, whereas if an employer offers a loan it may allow employees to focus on work as they will be less concerned about bills, overdue rent or other financial concerns. Knowing that the employer loaned the money may motivate the employee to work harder as well. 

As an employer thinking of introducing payroll loans, what do we need to consider?

The Chartered Institute of Payroll Professionals (CIPP) undertook a study which indicated that a fifth of employers surveyed offer payroll loan schemes and another quarter would consider doing so. Employers should consider the following areas when looking into payroll loans. 

• It is important to review your employee’s financial criteria to assess their ability to repay the loan. Each employee’s situation varies however repaying can be a source of stress and offering a loan could add another obligation. 
• Loan decisions may create discrimination concerns and if the exact reasons for refusing a loan to one employee are not documented then it may be possible for the employee to begin a discrimination claim. 
• Setting terms in advance can help ensure that a loan will be repaid. Using a loan agreement is essential in serving as protection for the organisation. Ensuring the employee understands the terms of the loan, particularly regarding repayment, and sign off on it is crucial. 

If you have any questions regarding the above, including if you would like advice and guidance on payroll loans, preparing letters and loan agreements, please contact Frankie Davis or Simon Balaam.