Increasing salary to get better Statutory Maternity Pay

[mobwell]

I'm asking this on behalf of a pregnant friend. She has a Ltd Co. which she contracts through and is the director of. She pays herself about £6K per years with big dividends every now and again. Looking into statutory maternity pay (SMP) it appears she can claim 90% of her average weekly wage with no upper limit for the first 6 weeks from her company which in turn claims back from the government. As it stands her average weekly pays is low (approx £120). If she paid herself a vastly increased salary to boost her average weekly pay could she get 90% of this or is there some rule to stop this?
I know she would then be liable for tax, NI on this and the company liable for NI, but it still seems worth doing. Am I missing something? Any comments?

On the same subject, over what period is the average weekly pay calculated?

[TheFaQQer]

Why doesn't your friend ask her accountant, rather than asking a friend to ask a bunch of unqualified strangers on a forum?

[SueEllen]

I will be kind and make it easy for you in case someone else needs the same answers in the future.

1. http://www.direct.gov.uk/en/MoneyTax...dren/DG_175917

2. http://www.hmrc.gov.uk/paye/rates-thresholds.htm#20

[Note: The links where found by putting "maternity pay limit" in a search engine. You can do this to if you want up to date information just make sure you search for UK pages.]

3. Then once you digested that have a talk with your accountant who deals with your company payroll.

[mobwell]

To take that argument further, why have an accounting / Legal forum at all. Just refer everyone to their accountant or solicitor.

Her accountant is far from good and the more advice the better in my book

[Wanderer]

On the same subject, over what period is the average weekly pay calculated?

I don't know what the period is either but that's the deal maker/breaker isn't it. Paying PAYE rather than taking dividends from the company is going to land her with a massive personal tax bill. My gut feeling is that the government will most likely take it with one hand and give it back with the other....

Then it also complicates her tax affairs which is a PITA. Personally, I prefer to keep it simple and there's less chance of something getting queried.

Alternatively she could retain as many dividends in the company as possible cease trading and do an ESC16 - she has a better than average reason for saying that she is ceasing to trade!

[mobwell]

Thanks SueEllen, that's why I posted here.
So I now know the period over which to average the weekly pay, just need to find out whether she can increase her pay to bump up the average.

[SueEllen]

Thanks SueEllen, that's why I posted here.
So I now know the period over which to average the weekly pay, just need to find out whether she can increase her pay to bump up the average.

That's why you got the original response to talk to your accountant.

As Wanderer stated even if you can do it, it will probably make life more difficult so don't be surprised if the accountant says "No".

[lje]

This is perfectly legal and acceptable. It is bound to be financially beneficial. She has to average out the money for the 8 weeks before the 15th week before her baby is due. So - pay extra for those 8 weeks and she gets 90% of that average free for 6 weeks after the baby is born. There's no way that the tax situation would leave her worse off.

It's also worth noting that she doesn't have to increase her salary - she can pay herself a one off bonus for being such a great employee. As long as it is paid during the 8 week period it counts towards the average.

[mikecoe]

Any PAYE investigation would look into why her salary suddenly increased.

Was it because of good business reasons, e.g. promotion or was it done to avoid paying tax (by netting off the larger SMP against your company tax bill).

If the investigator decideds its the latter, she would be dealt with accordingly.

[Hex]

It's also worth looking at terminating her employment 15 weeks before the baby is due or earlier. If you do this then she can claim Maternity Allowance rather than SMP, provided she has been paying NI for a year or so and it is easier to qualify for full Maternity Allowance. Also the money goes to her directly rather than going through the company, so no Employer's NI to pay. Look up the Maternity Allowance rules.