Do i HAVE to claim maternity pay?

[minstrel]

If you kept the salary at £646, then you'll still get £149 x 39 x 103% from HMRC = £5,985 with no NI cost. CT on that = £1,197, leaves you £4,788.

You make a good point that comparison should be against the non-bonus scenario. However, I think the figure we need to use is £136.78 not £149 multiplied by 39. So I agree company would get the £5,494.45 anyway if it took the less aggressive approach.

I still don't understand why SMP payments from HMRC give rise to a CT charge. Surely, all the SMP payments recieved from HMRC are paid out to the employee and are a legitimate business expense?

The NI hit would not be so large if calculated on a monthly/weekly basis rather than annual (which I used in previous example).

For the 1 bonus month where salary is £20,646, Employer's NI would be £2,413.79 and Employee's NI £631.10.

For the 6 weeks SMP at £2,211.10 per week, Employer's NI is £246.73 and Employee's £100.56.

Total NI is therefore £2,413.79 + £631.10 + (6 * (£246.73 + £100.56)) = £5,128.63

Assuming no CT:

£20k bonus route gives £18,268.54 SMP - £5,128.63 NI = £13,139.91

£0 bonus route gives £5,494.45 SMP - £0 NI = £5,494.45

If my figures are correct then it's a £7,645.46 difference and is possibly worth considering.

[minstrel]

It's worth noting the HMRC Statutory Maternity Pay calculator appears to be currently configured with the 2012/13 weekly rate of £135.45 rather than the 2013/14 rate of £136.78.

If their own calculators don't produce the correct figures what chance have the rest of us got!

[Jessica@WhiteFieldTax]

Apologies, yes, should be the lower SMP figure not £149. My oversight.

You have to include the CT on the SMP as its extra comoany income. Paying it out or not to employee is a red herring; your company gets a tax deduction, of course, for paying it out, but the recipient is then taxed subject to allowances.

NI method - for a non director you may get away with that, but I'd expect HMRC to pick it up and query it, and it may be a uncomfortable conversation.

[minstrel]

You have to include the CT on the SMP as its extra comoany income. Paying it out or not to employee is a red herring; your company gets a tax deduction, of course, for paying it out, but the recipient is then taxed subject to allowances.

I can see where you are coming from. You are trying to work the tax into the calculation, but I am getting a pre-tax difference, which I accept would have further CT/income tax.

I still disagree with the calculation though. You are applying 20% tax to the £18k additional SMP income to the company. However, doesn't Employers NI of £5k needs to be deducted before 20% CT/income tax can be applied? That would boost the figure by £1k.

It looks like the benefit is not as big as it instinctively appears, but I think it could be £2k ish using Director NI method.

[Jessica@WhiteFieldTax]

Yes, agree, there is tax relief on the Ers NI - I was aware of that but trying to keep things simple(ish).

There would be a number of things to tune, eg

~ really you should only be paying 100% of the SMP not 103%
~ how is the Ers funded in the bonus scenario, the 3% won't cover it so it has to come from reserves or another income stream. If you had either then you end up in a circular calculation of having to reduce the salary to afford the Ers, which means reducing the SMP, which means reducing the salary.
~ marginal tax adjustments if income shifts to/from someone in Higher / Additional Rate
~ small differences between Income Tax on salary and CT on profits, both 20% but sometimes can give slightly differing results due to grossing up, thresholds etc
~ effect on tax credits

I'll stop now before this post becomes an essay in why a tax accountants life is so difficult.

[minstrel]

I agree it's not a trivial calculation, but it's not intractable. I think the problem is we're trying to evaluate part of the "system" and the two different scenarios have an impact on other taxes/allowances for company/individual.

So, for my own sanity, I'm going to try and calculate the "full system" for a typical scenario.

Ltd company Director has baby due 07/11/2013. She has £30k of income in the Ltd and normally pays a monthly salary of £640 and extracts remaining profit as dividends. The question is would it be advantageous to pay a £20k bonus in the relevant period to increase the SMP or would the increased NI and tax outweigh the benefit.

The beginning of the relevant period is at least 23 weeks before due date and SMP can be up to 39 weeks. 23 + 39 = 62, so full period is always going to span 2 tax years which will change calculations. For the purposes of this calculation I'll assume leave starts at begining of November and there are 6 + 16 weeks of SMP until the end of the tax year. We'll also assume salary (excluding bonus) remains at £640 per month throughout the year.

Low Salary and Dividends

Average weekly earnings in relevant period: £147.69231
Weekly rate - first 6 weeks £132.93
Weekly rate - for remaining 16 weeks £132.93
Total SMP £2,924.46
Recoverable from HMRC (SMP @ 103%) = £3,012.19

Company Position

Ltd income = £30k + £3,012.19 = £33,012.19
Salary = £7,680
Ers NI = £0
Pre Tax Profit = £25,332.19
CT = £5,066.44
Post Tax Profit = £20,265.75

Personal Position

Salary = £7,680
Ees NI = £0
Dividends = £20,265.76
Total = £27,945.76


£20k Bonus

Average weekly earnings in relevant period: £2,455.38462
Weekly rate - first 6 weeks £2,209.85
Weekly rate - for remaining 16 weeks £136.78
Total SMP £15,447.58
Recoverable from HMRC (SMP @ 103%) = £15,911.01

Company Position

Ltd income = £30k + £15,911.01 = £45,911.01
Salary = £27,680
Ers NI = £2,757
Pre Tax Profit = £15,474.01
CT = £3,094.80
Post Tax Profit = £12,379.21

Personal Position

Salary = £27,680
Ees NI = £2,391
Income Tax = £3,646
Net Salary = £21,641
Dividends = £12,379.21
Total = £34,020.12

By my calculations you would be a clear £6,000 better off paying the bonus. More than happy for anyone to challenge my calculations though.

[northernladuk]

By my calculations you would be a clear £6,000 better off paying the bonus. More than happy for anyone to challenge my calculations though.

What does your accountant say?

[Jessica@WhiteFieldTax]

I think you are missing the PAYE and NI implications of the bonus? If she is a director then the NI would be on an annualised earnings period, so will be approx 25% of £20k, which wipes most of your saving out.

Edit: sorry, re -reading its the NI implications of the salary during enhanced SMP period. You've got to pay the salary to claim the SMP, so its Ers and Ees on the 6 weeks @ £2,209.

You also need to consider how the bonus is accounted for - are there profits or a loss carry back available for it?

[minstrel]

What does your accountant say?

I've asked the question and am awaiting a response.

[minstrel]

Edit: sorry, re -reading its the NI implications of the salary during enhanced SMP period. You've got to pay the salary to claim the SMP, so its Ers and Ees on the 6 weeks @ £2,209.

Thanks Jessica. Yes - you're right I missed out £12,299.10 of salary in the £20k bonus scenario.

Revised figures are:

£20k Bonus

Average weekly earnings in relevant period: £2,455.38462
Weekly rate - first 6 weeks £2,209.85
Weekly rate - for remaining 16 weeks £136.78
Total SMP £15,447.58
Recoverable from HMRC (SMP @ 103%) = £15,911.01

Company Position

Ltd income = £30k + £15,911.01 = £45,911.01
Salary = £39,979.10
Ers NI = £4,455
Pre Tax Profit = £1,476.91
CT = £295.38
Post Tax Profit = £1,181.53

Personal Position

Salary = £39,979.10
Ees NI = £3,867
Income Tax = £6,106
Net Salary = £30,006.10
Dividends = £1,181.53
Total = £31,187.63

It's still £3,000 difference compared to the non-bonus case which is possibly worth considering.

You also need to consider how the bonus is accounted for - are there profits or a loss carry back available for it?

Bonus would be accounted for from the £30k income. I'm assuming that company doesn't need profit to cover SMP as I thought it's a state benefit (but I could be wrong).