Maximising Statutory Maternity Pay

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.

Disguised Employment

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes, and hence pay low amounts of NICs, but from the outside they appear to act as employees. The following changes in the tax law are proposed to block the use of 'self-employed' workers working through LLPs or who are hired-out through employment agencies.

LLPs

All individual members of LLPs are currently taxed as self-employed persons, even if they receive a regular 'salary'. This is the default position of the law and nothing is being 'fiddled' to put workers in this position. However, HMRC believe this rule is being abused, and the workers involved may not realise that they are technically self-employed.

From 6 April 2014 salaried members of LLPs will be treated as employees of the LLP if all of the following conditions are met:

- the member works for LLP and at least 80% of the pay he receives from the LLP is 'disguised salary';
- where the member has contributed any capital to the LLP, that capital amounts to less than 25% of the member's 'disguised salary' for the year; and
- the member is not involved significantly in the management of the LLP.

The Government has not yet defined term 'disguised salary'. If you have salaried members in your LLP we need to talk about these tax changes.

Employment Agencies

From 6 April 2014 if a worker supplied by an offshore employment agency personally carries out the work, or is involved in the provision of the services, the payment from the engager to the worker will have to be taxed under PAYE with class 1 NICs deducted. Any apparent right of substitution in the worker's contract will not prevent PAYE and NICs being due at the employed rates. The agency at the end of the chain must be an off-shore agency for the new rules to apply, but there may be UK based agencies in between and it may not be obvious to the worker or the engager of that worker, that an off-shore agency is in the chain

If you have any doubts about the contracts you are using either as a worker or an employer, our tax experts can help check the tax implications for you.