Statutory maternity pay for contractors
Written by Ray Coman
Contracting provides many benefits: flexibility of work, tax saving and independence from employment relationship. However, the work arrangement also brings sacrifices. Most companies are set to pay minimum salary with the remaining pay in dividend. The result is a reference pay for the purpose of determining statutory entitlement which offers minimal buffer in the event of maternity.
For expectant mothers who are sole traders or who have not been contracting for long enough, maternity allowance is a satisfactory alternative. There is rarely any merit in convoluted retroactive pay adjustment to try and engineer a better maternity pay outcome. What increase in HMRC SMP compensation is achieved would be lost through higher national insurance liability.
It s a requirement that the expectant mother has worked continuously for 22 weeks before the qualifying week. The qualifying week is 15 weeks before the expected due date. There the latest start date for employment has to be 37 weeks prior to the expected due date.
It is not possible to change the registration date of the company. If an existing payroll scheme is in place, it would be impractical to try registering a new payroll from an earlier date. Given that the filing of payroll reports for the first time would expose the company to penalties, it would be more practical to consider maternity allowance in that situation. If there is insufficient historical pay to meet the SMP requirement, maternity allowance is a suitable alternative, which would probably result in the same, in not greater, maternity leave compensation from the government.
It is better to try and get maternity pay all in one tax year. A shareholder/director will have greater scope to determine when to start paying herself SMP. Ideally, the first pay day should start on a date that results in the last payment ending before the following 5 April. The reason is that the SMP can all be paid in one tax year and therefore paid more quickly.
The soonest maternity leave can be taken is 11 weeks before the expected due date. The latest maternity leave can be taken is 2 weeks before the expected due date. Leave starts automatically if the baby is born before the expected date. There is therefore some scope to engineer a start date so that falls entirely within one tax year.
Statutory maternity pay starts on the same date as leave and lasts for 39 weeks. Every eligible mother will get 39 weeks’ worth of SMP, however if the SMP pay dates straddles two tax years, it could mean waiting longer for the some of it.
Since the contractor is both employer and employee it is not necessary to send the MATB1 or medical certificate stating the expected due date. However, this information should be carefully retained in case of any HMRC enquiry.
Statutory maternity pay is made up of:
- Earnings Related Rate (ERR) for the first 6 weeks; and
- Standard Rate paid for the remaining 33 weeks.
Earnings Related Rate is 90% of gross pay.
The standard rate is a the lower of Earnings Related Rate and the statutory amount.
The Earnings Related Rate is calculated as 6 weeks of usual pay divided by 90%.
Small businesses can claim 3%. Therefore, the total 39 weeks of SMP are added together and multiplied by 3%.
The first step is to process SMP through payroll. Often directors are paid up to the national insurance threshold for the purpose of tax efficiency. A year-to-date SMP figure will be included in the submission made to HMRC. If SMP is added by way of adjustment to previous months it is called an Additional Full Payment Submission.
To keep tax efficiency, consider paying director’s salary to top up between the Earning Relate Rate and director’s salary. This will usually be a salary of 10% of the usual rate.
Most contractors are not set up to make payments of PAYE. For tax efficiency, profit extraction in excess of salary up to the national insurance threshold is paid in dividends. Therefore, the SMP due back from HMRC cannot be deducted from PAYE liability. Instead, it needs to be claimed via an application for an advance of Statutory Maternity Pay.
It is necessary to make the payroll submission ahead of the online application to ensure the application is successful. Double check the payroll figure matches that on the SMP advance application.
It is not possible to make an application more than 4 weeks before the first payment of SMP.
Once the application is processed by HMRC, the credit will remain unallocated on the PAYE account of the company. As explained above, most contractors will not have a PAYE liability, paying personal tax instead through a Tax Return. Therefore, HMRC need to wait until the end of the tax year to pay the amount. The reason HMRC wait is that (in principal) the company could have a PAYE liability between the date of the claim and the end of the tax year. Even if in practice, the company would not have any PAYE liability, the HMRC system cannot be altered to pay SMP before the end of the tax year.
Therefore, the credit will become repayable once the 5 April following the date of the claim has passed. Since any PAYE for the month ended 5th April is not due date of 19th April, the refund will be payable after 19th April.
In some cases if the advance SMP claim has been competed properly it could arrive in the company bank account within three weeks.
Statutory Maternity Pay is taxable in the hands of the employee. When it is paid to the company it is taxable, however the corresponding salary will result in a neutral position. So there is no corporation tax payable by the company.
In this respect, maternity allowance could be slightly more tax efficient than statutory maternity pay. This is because Maternity Allowance is a tax-free benefit. However, if a director has been receiving salary for long enough to be entitled to SMP, she would not be eligible for maternity allowance.
Maternity Leave is not so straightforward for a contractor. She will not have the comfort of leaving the practicalities of pay to her employer and will need to sort out eligibility herself. However, Coman&Co is a payroll bureau, contractor company account, tax preparer and tax advisory service. We therefore have the expertise to deal with all aspects of what can be a complex piece of compliance.