Paying statutory maternity pay (SMP) is not optional. It must be paid if your employee qualifies, but the good news is that a small business can recover 103% of the SMP paid from HMRC. A business that pays less than £45,000 of class 1 NICs in one tax year is defined as "small" for this purpose.
In a family business there may be scope for maximising the SMP payable for the first six weeks of maternity leave, and hence getting the Government to refund that SMP with a bit extra to cover the employer's NICs due. Let's see how this could work.
Where the employee earns at least £111 per week the employer must pay SMP at these rates for the following periods:
- for the first 6 weeks - 90% of the employee's average weekly earnings (AWE);
- the remaining 33 weeks - the lower of £138.18 or 90% of their AWE.
If a bonus is paid in the crucial "relevant period" - which is used to calculate the employee's "average weekly earnings" - the SMP payable for the first six weeks automatically increases. The remaining 33 weeks of SMP are not affected as that period is paid at a flat rate where earnings exceed £153.53 per week.
The relevant period is a period of at least 8 weeks ending on the pay day before the "qualifying week". The qualifying week falls 15 weeks before the expected birth date, so you need to know the expected date of birth before timing the bonus payment.
Say the expectant mother normally earns £520 per week, she will receive £468 per week in gross SMP for the first six weeks. Her employer will pay class 1 NICS of £260.82 on top of this SMP and will be able to recover: £468 x 1.03% = £2,892.24. If the class 1 NICs on the SMP are covered by the employment allowance of £2,000 for the business, the employer effectively recovers £2892.24 against an SMP cost of £2808.
However, paying a large bonus won't necessarily be tax effective; it depends on how much NICs can be covered by the employment allowance.
Say the employee receives a bonus payment of £2,000 in the relevant period, this bonus generates an employer's NICs bill of £276, and increases her AWE and hence her SMP for the first six weeks to £675 per week. Her employer can recover £675 x 1.03% for six weeks = £4171.50.
But this is a marginal increase from £2892.24 which was recovered without the bonus; an increase of £1279.26 for paying out £2447.40 (bonus + NICs on the bonus and SMP).
There is a calculator on the GOV.UK website that can help you work out the SMP that will be due, and you can change the answers to each question to see how difference in pay will change the SMP. We can also help you crunch the numbers.