A query from a client:
I am about to go on maternity leave and need some advise in terms of paying myself a bonus to increase my SMP.
Our reply:
Alas, its a nice idea but probably not worth it.
I’ve just done some quick figures. I’ve assumed you are currently on a salary of £8k and you were thinking of increasing to £40k by bonus.
Your SMP is 6 weeks at 90% of average pay, then 33 weeks at lower of £135.45 or 90% of average weekly pay. Average weekly pay comes from the previous 8 weeks. Theres little to choose over a one off bonus, or increasing the salary over those 8 weeks.
A small business (paying less than £45k pa of NICs over to HMRC) can claim back 103% of the SMP.
Superfically then its attractive to increase salary and get more SMP back – in practice it only impacts on the first 6 weeks – after that the £135.45 floor cuts in in most cases.
On the figures above, on £40k you could increase the SMP to £4,153 for the first six weeks (£40k/52 x 90%). You claim £4,278 back from HMRC (£4,153 @ 103%).
On £8k, the SMP for those 6 weeks would be £830 (£8k/52 x 90%), and the recovery thus £855.
However, you need to factor in:
(a) Corporation Tax on the £3,422 extra SMP – that reduces it to £2,738
(b) Extra NI on the increased salary in the previous 8 weeks, and next 6 weeks – on £8k NIC would be negligible. On £40k over 8 weeks (bonus or salary), and then enhanced salary for 6 weeks the combined Employers and Employees NI would be £9,698(*1)
Therefore the NI negates the SMP recovered.
I’ve ignored Income Tax on salary, as its broadly the same as Corporation Tax saved.
You can juggle with different permeutations of course, but the answers likely to be the same alas.
NB 1 rates and calcuations rounded in places
NB 2 12/13 rates
(*1) Extra payroll of £38,769 in 8 weeks (£40k less 9/52nds of £8k) plus extra payroll £3,323 in first 6 weeks (90% of 6/52nds of £40k pa less £8k pa). Total extra £42,092. NI at 13.8% employers and 12% employees, less Corporation tax saved on Employers = £5,808 + £5,051 less £1,162) = £9,698.