PROFIT EXTRACTION - 21.04.2005

How to increase your partner’s SMP

Maximising the tax-free SMP

Previous advice. Previously we have shown that if, say, your partner was pregnant and due to go on maternity leave, you could legitimately increase their average weekly earnings and thus the SMP payable (see year 3, issue 10, page 3) by paying a bonus in the relevant period. This still works but you can now take this one step further.

Recap. Average weekly earnings are needed for the calculation of SMP and these are taken from a period known as the reference period. The exact calculation depends on the frequency with which the employee is paid, but is broadly the eight-week period ending on the last payday before the start of the week that is fifteen weeks before the baby is due. (The calculation is set out in detail in Help book E15).

Pay rises. Since 1996 any pay rise that is back dated to a time that falls within the so-called reference period had to be take into effect when calculating average weekly earnings for SMP purposes. However, pay rises that were effective after that reference period were ignored. This has now changed.

Recalculation possibility

Recent case. In the recent Alabaster case, the European Court of Justice ruled that all pay rises that are effective in the period from the start of the relevant period to the end of the maternity leave period (ordinary maternity leave or additional maternity leave as appropriate), had to be taken into account in working out whether a woman is entitled to SMP (and the amount of the SMP). The pay rise does not have to be backdated to some point in the relevant period to have effect.

From April 6, 2005. The recent regulations that have been brought in (Statutory Maternity Pay (General) (Amendment) Regs 2005) mean that each time there is a pay rise that takes effect in the period from the start of the reference period to the end of the maternity leave period, it is necessary to recalculate average weekly earnings as if the pay rise had taken effect from the start of the reference period. Which means? Where average weekly earnings rise as a result of the recalculation, you (the employer) must pay any additional SMP due.

From scratch. If the recalculation means that the employee is now entitled to SMP when previously she wasn’t, you (the employer) must; (1) work out 90% of the new average weekly earnings; (2) take away the standard rate of SMP (as it is assumed that the woman has received maternity allowance); and (3) pay the difference as additional SMP.

Backdate her pay rise

Tip 1. Backdating a “back-to-work” pay rise to just before the end of the maternity leave period, or timing the maternity leave to end just after an annual pay award is worthwhile. The employee (your partner) will get more SMP at little or no cost to you (the employer).

Tip 2. Of course, remember to claim the additional SMP back through your monthly PAYE figures. Small employers can recover all SMP paid, plus a handling supplement of 4.5%. A small employer is one whose total annual NI bill is £45,000 or less. Employers with an NI bill above the small employer’s relief threshold can still recover 92% of any SMP paid.