A contractor’s guide to maternity pay

It’s quite understandable that you want to receive maternity pay as an IT contractor who’s also a mum-to-be, but first an important distinction.

Let’s first of all draw a distinction between statutory maternity leave and statutory maternity pay, as there are different rules for each, writes chartered accountant Graham Jenner, founder of Jenner & Co.

What is Statutory Maternity Leave (SML)?

Statutory Maternity Leave is a period during which your employment rights are protected.

However, if you operate through your own limited company (also known as a Personal Service Company) protecting your employment rights isn’t an issue.

Similarly, if you work through an umbrella company, your rights are really dependent on you obtaining future contracts, and so arguably maternity leave is not an issue here, either.

What is Statutory Maternity Pay (SMP)?

Statutory Maternity Pay is the amount that you are paid by your employer provided you meet eligibility criteria.

And the qualifying criteria for SMP is three-fold:

1. You have to earn on average at least £123 per week in the 8 weeks (if paid weekly) or 2 months (if paid monthly) up to the last pay day before the end of the 15th week before your baby is due.

2. Give the employer the correct notice and proof you are pregnant

3. Have worked for your employer continuously for at least 26 weeks continuing into the 15th week before the expected week of childbirth.

Do limited company tech freelancers qualify for SMP?

If you operate through your own one-person limited company / PSC as, say, an IT contractor, then looking back at the above criteria:

1. You probably qualify on the pay condition – provided you are reporting this each week or month. However, as it is based on the earnings subject to National Insurance, if you process your pay annually, as some PSCs do, you may not qualify. You might, therefore, want to process your pay weekly or monthly, at least for those 8 weeks (or 2 months) before childbirth.

2. Handing yourself the correct notice should be fine!

3. You will generally have worked for your limited company / PSC as its employee continuously for at least the 26 weeks mentioned above -- unless you haven’t been operating the company for that long or have been working elsewhere.

If you don’t qualify on this ground, you may nevertheless be eligible for Statutory Maternity Allowance – see below.

Do umbrella company workers qualify for SMP?

If you operate through an umbrella company, in IT/Technology or any other sector then:

1. If you have been working in the relevant 8 weeks (or 2 months) then you will probably have built up enough average earnings – especially if you work in the usually wage-rich sector of IT/Technology. However, due to the nature of contracting, you may not have worked for some or all of that period, which could mean your average is less than the £123 threshold. (N.B. The average is based on the earnings that are subject to National Insurance.) You may nevertheless be eligible for Statutory  Maternity Allowance (SMA) – see below

2. You will need to make sure you give the umbrella the correct notice.

3. As referred to already, due to the nature of contracting, you may not have worked for the umbrella company – continuously -- for at least 26 weeks up to the 15th week before the week of childbirth.

Be aware, ‘worked continuously’ appears to mean been paid each week. If you have had weeks during those 26 weeks where you have been out of contract, then those weeks will not count as having worked for your employer, albeit that you may technically still be an employee and were so during that period! If you don’t qualify on this ground, you may nevertheless be eligible for SMA – see below

I’m an IT contractor who qualifies, how much SMP will I be paid?

For each of the first 6 weeks, you’ll receive 90% of your average weekly earnings.

For the next 33 weeks – you’ll receive the lower of £184.03 per week and 90% of your average earnings

I’m an IT contractor who’s eligible, how much Statutory Maternity Pay will I receive as a limited company?

If you work through your own limited company, and you pay yourself a small salary each week, let’s say £200 per week (£10,400 annually), your company can pay SMP of:

• 90% x £200 for the first 6 weeks, then;

• £184.03 for the remaining 33 weeks.

Pleasingly to limited company IT contractors who we advise, the SMP can be recovered by the company. In fact, the PSC will probably be able to recover 103% of the SMP paid!

Increasing your pay in the eight weeks used for the average

I have seen various suggestions online regarding the possibility of increasing your pay in the 8 weeks used to calculate the average pay. The potential benefit is that the company pays you extra SMP which the government funds at 103%.

Some commentators say it isn’t worthwhile, due to the extra tax, employers NI and employees NI on the additional salary. Others say it is worthwhile.

My view is that it depends on how much you pay yourself normally, how much the company could afford to pay you in those 8 weeks and your own perception of how much makes it worthwhile! For some people a net saving of, say, £500 is not worth the aggravation but for others it absolutely is.

It is certainly worth ‘doing the maths’ – I have seen one calculation suggesting a net benefit in the thousands of pounds!

As it happens, the maths is quite complicated so ask your accountant. In fact, we would recommend reaching out to a contractor accountant whose team is both familiar with the not straightforward calculations here and attuned to your personal circumstances as an IT contractor approaching motherhood. And yes - full disclosure, we are such an accountant!

Statutory Maternity Pay for contractors using an umbrella company

By contrast, this is a relatively straightforward calculation – it’s 90% of your average pay as noted above, for the first 6 weeks and the flat rate of £184.03 per week for the remaining 33 weeks.

Help! I cannot receive Maternity Pay. Can I receive Maternity Allowance, instead?

If you don’t qualify for SMP, you may qualify for Maternity Allowance instead, if you are:

• Employed but don’t qualify for SMP

• Self-employed

• Recently stopped working

• Take part in unpaid work for your spouse or civil partner’s business (if they are self-employed)

You can apply for the Maternity Allowance as soon as you have been pregnant for 26 weeks and it can be paid for up to 39 weeks. It is paid through Jobcentre Plus.

How much is Maternity Allowance?

The rate is the same as SMP – though the first 6 weeks are not paid at 90% of average earnings but at the lower of 90% of average earnings and £184.03 (i.e. the same as applies for the last 33 weeks under SMP).

If you are self-employed, the rate can be as low as £27 per week if you haven’t paid enough Class 2 National Insurance for at least 13 of the last 66 weeks. However, if you haven’t, you can make additional payments of Class 2 National Insurance to increase the amount of Maternity Allowance.

Given that Class 2 NI is only £3.45 per week, and you only need an additional 13 weeks at most to get to the full £184.03, it is often worthwhile making the additional Class 2 NI payments.

Strict rules

Be aware, the rules on Statutory Maternity Pay and Maternity Allowance are strict and often people don’t think about the implications until it is too late to change anything.

For an employee working for an employer with a regular salary, it doesn’t matter; the SMP will be based on that salary (at least for the first 6 weeks) and there is no flexibility.

However, for someone working through an umbrella company, there is the scope to (at least) try to make sure that there are earnings in the relevant period -- for calculating the average.

Final thought on maternity pay as a limited company: Don’t leave it to the last-minute!

For a contractor working through their own limited company / PSC, there is even more scope to juggle with both the timing and the level of earnings that affect the level of SMP.

But to optimise that flexibility, strongly consider consulting a contractor accountant, and to avoid further angst at what can be a potentially stressful time, ideally at least a bit before the monies are going to be needed!