A guide to maternity pay for IT contractors
If you’re a contractor it’s possible that one of the reasons you decided to take the plunge into this more flexible way of working is because you wanted a better work-life balance.
Your family may well be a large part of this, but do you know what you’re entitled to as a limited company contractor if you or your partner becomes pregnant? Chris Deakin of Intouch Accounting asks the question.
The first thing to make clear is that if you’re a director of your own limited company and you take a wage you’re an employee, you’re not self-employed (a common misconception that agencies seem to perpetuate). As such you are entitled to all the benefits that a normal employee would be, and that an umbrella employee would be – possibly including Statutory Maternity Pay (SMP), Maternity Allowance (MA) or Paternity Pay.
SMP – how much is it and can you claim it?
In order to qualify for SMP you must have earned at least £118 a week, on average. You must also have worked continuously for at least 26 weeks up to the 15th week before childbirth. So, if your baby is due on 31st October 2019 you must have worked for 26 weeks up to the end of July 2019.
SMP starts at 90% of your average earnings (before tax) for the first 6 weeks. It then drops to either £148.68 or 90% of average earnings, whichever is lower, for the next 33 weeks. If you have control over how much you pay in wages you could increase your average wages to make the 90% average worth more, but bear in mind that you will then pay more tax and NI, so you’d need to balance the benefits with the extra tax you’ll pay on both the increased wages and possibly the SMP itself. Discuss this with your accountant if you’re considering it, and if you still have time to increase your wages.
SMP is paid through the PAYE system, in the same way as wages are, and is subject to tax and NI deductions. The employer can reclaim SMP from the government by reducing their PAYE liabilities, and also claim an additional amount for compensation if they qualify as a small employer.
Your midwife will supply a form MATB1 – give a copy of this to your accountant when you have it, and they should do all the necessary calculations for you once they know when you’re intending to stop work. If you’re not entitled to SMP for any reason they will give you a form SMP1 explaining why.
Maternity Allowance – how much is it and can you claim it?
If you’re self-employed (a sole trader), earning under £118 per week on average or you haven’t been working for your employer for long enough, you won’t be entitled to SMP. You may however be entitled to Maternity Allowance (MA), provided you were employed for at least 26 weeks out of the 66 weeks before the birth, and earned more than £30 a week or more in at least 13 weeks. Weeks do not have to be together.
Maternity Allowance is £148.68 for up to 39 weeks, or 90% of your average weekly earnings if less. You will then be entitled to £27 a week for up to 14 weeks. The allowance is paid direct by the government rather than through the PAYE system.
Maternity Allowance can be claimed as soon as you’ve been pregnant for 26 weeks, and actual payments can start 11 weeks before the baby is born. If you receive other benefits you should check the interaction with them, so talk to your local Job Centre.
What if you adopt?
The rules are generally the same if you adopt a child, but the payments are known as Statutory Adoption Pay rather than Statutory Maternity Pay. Leave starts up to 14 days before the date the child starts living with you, or up to 28 days before the date the child arrives in the UK if it’s an overseas adoption.
Paternity Leave – how much is it and can you claim it?
If you’re the one who is expecting and your spouse is employed, including being employed by their own limited company or by yours, they may be entitled to two weeks off as well, paid at a rate of £148.68 per week or 90% of average weekly earnings (whichever is lower). They must have worked for the employer for 6 months, and have a relationship to the child (father, partner/husband of mother, adopter).
The two weeks must be taken consecutively, and must be within 56 days of the baby's birth. You must give 28 days’ notice if you want to change your start date, this doesn’t have to be precise.
Sharing Parental Leave and Pay
Parents are able to share up to 50 weeks’ parental leave and 37 weeks’ pay, perhaps even swapping blocks of leave between them if their employers agree.
After the baby is born - considerations for contractors
HMRC do have some savings schemes for child care that you can consider. One of the options is ‘Tax Free Childcare’ which you can get up to £500 every 3 months (£2,000 a year) for each of your children to help with the costs of childcare. This is done through every £8 you pay the government will pay £2. This is done through an online childcare account which you can set up on the government website.
You may also be able to get up to 30 hours free childcare once your child is 3 to 4 years old.
Contractors should also consider restrictions to child benefit, if you claim it. If your income (or that of your spouse) is over the £50,000 then your tax return will claw back the child benefit and you'll pay it along with your tax. If you know your income is likely to be over the limit in future you can either inform the DWP now that you don't want the benefit, or just repay it at the end of each year (like an interest-free loan). It can be better to claim and then repay because your circumstances may change part way through a year, and you cannot backdate a claim. So if you don't claim but later realise you could have, you've lost the money.
Editor’s Note: Further Reading -