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, asks Clare Rickman of In–Touch Accounting, do you know what you’re entitled to as a limited company contractor or an umbrella company employee if you or your partner becomes pregnant?
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 £111 a week, on average. You must also have worked continually for at least 26 weeks up to the 15th week before childbirth. So, if your baby is due on 31st October 2014 you must have worked for 26 weeks up to the end of July 2014.
SMP starts at the higher rate of £138.18 and 90% of your average earnings (before tax) for the first 6 weeks. It then drops to a flat £138.18 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.
You can start claiming from 11 weeks before your baby is due, or the day after the baby is born if they are early. If you’ve been ill due to a pregnancy related illness in the 4 weeks before the baby’s birth, leave starts automatically at that point.
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 or umbrella company 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), earn under £111 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.
MA is £138.18 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 (if the due date is after 27/07/2014). The allowance is paid direct by the government rather than through the PAYE system.
MA 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.
Don’t forget Paternity Leave
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 £138.18 per week. 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 6 months of the baby’s birth. Alternatively your partner may be able to take up to 20 weeks paternity leave, but only if you have started work again and are no longer claiming SMP.
Changes from April 2015
From April next year there are going to be changes to the current system in an effort to make it more flexible. Parents will be 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
Childcare vouchers aren’t to be sniffed at. In fact, the company can pay up to £55 a week, or £243 a month, on behalf of each employee provided they are basic rate taxpayers (as far as salary goes, ignore dividends for this purpose). Anything above the £55 limit will be taxed on the employee as a benefit in kind.
The payment must go direct from the company bank account, with invoices in the company name, and it cannot be reclaimed on expenses. Keep copies of any contracts to prove it’s a commercial arrangement and it’s not the company paying your own personal liability.
The money must be paid to a registered childcare provider (not a family member etc). This can include private school fees in some cases, breakfast or after school clubs, or other childcare facilities. Ask the provider if they accept vouchers, and if they do you’re fine to simply pay them directly from your company.
There is no need to actually go through a voucher provider unless you wish to save up the vouchers to use them at a later date. This can be useful when the baby is first born, before you're actually incurring costs. You'll have to pay an admin fee to the voucher provider, but that will work out less than the tax you'll save by doing it. Then as soon as you start incurring actual childcare costs just cancel the vouchers, use the ones you've saved and start paying direct.
Contractors should also consider the recent changes 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. If you’re the mother you will also have your record marked as a qualifying year for pension purposes if you’re claiming child benefit (even if you claim but then tell DWP you don't want the money!)
Editor’s Note: Further Reading -