Limited company guide to maternity leave: overview for contractor mums (and dads)-to-be

It’s a common misconception that maternity leave doesn’t apply to one-person Personal Service Companies, however, this is untrue.

As a pre-condition to qualifying for maternity leave, you must be eligible for either Statutory Maternity Pay (SMP), or Maternity Allowance.

You can only claim one at any given time and if you are not eligible for statutory maternity pay, you may be entitled to maternity allowance which is typically the case for sole traders, writes Keith Tully of Real Business Rescue, company liquidation and turnaround specialists.

But to qualify for SMP, you must satisfy the continuous employment rule and meet certain earnings criteria.

The ins and outs of claiming statutory maternity leave

If you are eligible for statutory maternity pay, you can take up to 52 weeks of maternity leave. The first half of this is classed as ‘ordinary maternity leave’ and the remaining half is classed as ‘additional maternity leave’.

The earliest that maternity leave can be taken is 11 weeks before the due date, however, if the child is born early, your period of leave will officially begin on the day after the child is born. You must also take 2 weeks’ maternity leave after the birth of the child which is known as Compulsory Maternity Leave.

If the baby is born premature, so 15 weeks or more before the expected due-date, you will need to work out the SMP. If the baby dies or is stillborn after the beginning of the 24th week of pregnancy, you will still be eligible for maternity leave.

Remember that any work carried out beyond your 10 Keeping In Touch (KIT) days could threaten your maternity pay or allowance.

Am I better or worse off claiming maternity leave and pay?

Maternity pay is a form of employment income which is subject to the same taxation rules as other employment income, so it’s wise to assess the financial benefits of claiming maternity pay and taking maternity leave, in line with a tax-efficient structure for salary and dividends.

A common pitfall for limited company directors is that the NIC and tax applied to statutory payments can typically cost more than any long-term gain made.

On the other hand, entitlement to maternity leave may push pregnant directors to claim SMP and maternity leave. The financial benefit may not be your sole driver as this isn’t typically lucrative for company directors. However, the maternity leave attached is the true advantage in most cases.

In reality, maternity leave may not be feasible for sole-person limited company directors as the business would need to continue driving an income during this period. In most cases, you may not be eligible for statutory maternity pay unless other employees can maintain the business and carry out the necessary tasks to keep your business running and generating an income. A common solution for this is to appoint a ‘temporary director’ during your period of leave, or reassign your tasks to an employee.

To efficiently structure your income in the run-up to maternity leave, we recently crunched the numbers to formulate an ideal combination of PAYE income, maternity pay and dividends without incurring tax implications.

Statutory Paternity Leave

Of course, dads matter too! Employees can choose to take either 1 week or 2 consecutive weeks’ paternity leave. However this cannot be taken before the birth of the baby. It should start from the date of the birth or an agreed date after the due-date or actual birth date. The period of leave must finish within 56 days of the birth or due-date if the baby is early. To be eligible for paternity leave, you must:

  • be employed by the limited company up to the date the child is born
  • be on payroll and earn at least £120 gross weekly income in an 8 week ‘relevant’ period
  • give 15 weeks’ notice
  • have been in continuous employment by your limited company for a minimum of 26 weeks, up to the 15-week notice period

Would Maternity/Paternity Leave be more generous if I were a sole trader, rather than a PSC?

If you are a sole trader, you will typically be entitled to Maternity Allowance over statutory maternity pay as SMP requires you to have a full-time employment contract. However, from a maternity leave point of view, your rights remain the same.

There are two rates of MA; full and reduced, which will depend on your national insurance record. From a financial perspective, the maternity pay is more competitive for a limited company point of view than a sole trader. However the maternity leave benefit remains the same. If you’re self-employed, complete a MA1 claim form to send in your application for maternity allowance.

Unfortunately, self-employed fathers are not eligible for paternity pay and therefore there is no paternity leave. If you would like guidance on your specific situation, use the ‘Pay Leave for Parents Eligibility Checker or speak to your accountant. Childs-play and ‘ABCs’ might be your future, but working out eligibility and efficiency when it comes to paternity and maternity leave and pay is unfortunately not as simple as either!

Friday 31st Jul 2020
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Written by Keith Tully

Keith Tully is a partner at Real Business Rescue, specialising in restructuring and turnaround support for businesses edging closer to insolvency, forced closure or voluntary liquidation.
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