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Parental Pay

Parental pay - Tax & NICs implications

In accordance with employment law information (published by the department for Business Innovation and Skills) the “contract of employment continues through the 52 weeks of Ordinary and Additional Maternity Leave - unless either the employer or employee expressly ends it or it expires”. Equally employers are informed that it is “unlawful to select a woman for redundancy or terminate her contract because she is pregnant or on maternity leave”. Redundancy must follow the correct process.

So, once an employee has let you know that they might return to work once their maternity, paternity or adoptions leave is complete, it will be time for you to look at their contract, tax position of statutory (or contractual) payments and their non-cash benefits entitlement. This is quite straight forward to administer – the employee retains the right to return and also have a right to continued non-cash benefits in kind and continued pension entitlements.

However, the position changes when a termination of the contract occurs expressly and legitimately by the employer or the employee.

The provision of non-cash benefits for 52 weeks during maternity leave is worrying a small number of employers and the practice remains varied. Some employers attempt to cleverly word contracts that will magically withdraw the provision of non-cash benefits during maternity leave.

The government’s position on this is particularly clear; employers must apply the minimum standards of entitlement for employees.

Such contrived contracts that attempt to protect the employer are ineffective and contrary to anti-discrimination law - which could prove an expensive route for any employer who thought they could get away with it. Alternately, and subject to the terms of the contract, an employee may be able to voluntarily opt out of receiving non-cash benefits, although guidance is very clear that an employer cannot compel this upon the employee.

So if an employee’s contract has genuinely ended, what is the position with the implication of tax and National Insurance Contributions (NICs)? When does the employee issue the P45 and what leaving date should be put on the P45?

Firstly it must be understood that any qualifying employee remains entitled to any statutory payment remaining from the employer even if the contract is ended.

In general terms, SMP, SAP or SPP are included in an employee's gross pay at the time it is paid and fully subject to Income Tax and NICs through PAYE in the normal way.

Following the issue of the P45, employers may consider making a lump sum payment for any remaining amount – unless the sum is paid with the last regular earnings and therefore added and treated as normal regular earnings for NICs purposes, NICs are worked out using a single weekly earnings period as it is treated as an irregular payment after leaving.

If the employer continues to make regular payments, then NIC are worked out using that regular earnings period.

If the payment is paid at a different interval to the regular earnings period, then NIC are now worked out using the revised interval (for example a multiple of weeks instead of monthly).

HMRC advise that when an employee has decided not to exercise their right to return to work or has been dismissed, the employer should give them their P45 at that point and deduct Tax at Basis Rate (BR) on any subsequent payment of SMP, SAP or SPP (as a payment after issue of P45 and leaving had been made).

However the HMRC do allow the concession of where the employee has not requested a P45, that tax continues to be deducted as normal and the P45 issue be delayed until the final payment is made. HMRC instruct the employer to enter as the date of leaving on the P45, the date of the final payment.

If the employee requests their P45, then the date of leaving is the date which the last payment was made prior to the request and all future payments are treated as payment after leaving and issue of P45 and taxed at BR.

If the employee has not been dismissed or has made no indication of not returning to work, they remain an employee even after the final payment of SMP, SAP or SPP until either they formally cease to be employed or they fail to return to work on the appointed day. At this point the employer gives the employee their P45.