Going on maternity leave involves a lot of planning and lots of meetings and form filling. If you have a permanent contract with your employer and have been working with them for more than a year, things are probably quite straightforward, but not every mum is in that position.
For one thing, because of the current economic climate (or other reasons), a lot of mums-to-be work on short-term contracts or fixed-year contracts, and if your maternity leave falls on or very near the natural end of your contract, your employer may choose to pay your maternity pay in a lump sum – and it can often mean paying tax on all of it.
Mark Chant, Tax and Trust Adviser, for Lester Aldridge LLP gives the lowdown on what maternity pay can be taxed, and how and if you can claim back the tax paid on lump sum maternity payments.
Statutory Maternity Pay (SMP) is a weekly payment which the employer would normally pay to the employee in the same way and in the same frequency as the employee received their wages, ie. either weekly or monthly but if agreement can be reached between the employee and the employer the full entitlement may also be paid in one lump sum.
SMP is subject to PAYE income tax and national insurance contributions (NIC) regardless of the frequency with which it is paid.
Although payment in a lump sum is often convenient for both you and your employer, in certain circumstances it can lead to overpayments of national insurance contributions for both parties and overpayments or underpayments of the SMP itself.
When SMP is paid by an employer, PAYE income tax and NIC’s are deducted from the payment before the employee receives it.
Some or all of the income tax deducted by the employer can be reclaimed by the employee, depending on individual circumstances, but how you go about reclaiming this tax on maternity pay will depend on whether you normally complete annual self-assessment tax returns or not
Claiming back tax if you usually do a self-assesment tax return
If you receive a self-assessment tax return to complete each year then you should write to HM Revenue & Customs (HMRC) at the tax district where your records are held (the office and address will be shown on a recent tax return or PAYE coding notice) and say that you wish to make an ‘in-year’ repayment claim of the tax deducted from the SMP payment.
You should provide HMRC with:
- a copy of the payslip showing details of their earnings to date
- the lump sum SMP payment you have received
- a letter that gives an estimate of your expected total income from all other sources for the whole of that tax year.
HMRC will then calculate and refund the amount of tax due to you based on this information.
After the end of that tax year, when you complete your tax return with actual income figures rather than estimates, you will need to include the amount of the income tax already repaid to you by HMRC in respect of the SMP payment so that it can be accounted for in the calculation of your actual tax position.
What to do if you don’t usually complete a self-assessment tax return
If you do not normally complete a tax return each year, the process is a little different. You’ll need to complete a tax repayment claim form (also called an R40) which, along with guidance notes, can be obtained from HMRC’s website at www.hmrc.gov.uk (and search for R40).
This simple form should be completed with details of :
- your earnings received so far;
- the SMP payment;
- the tax deducted from it; and
- estimates of their expected total income from all sources for the whole of that tax year.
Send the completed form to your tax district and HMRC will then calculate and repay some or all of the tax deducted from the SMP payment, depending on individual circumstances.
You may receive another R40 from HMRC shortly after the end of the tax year which you will then be expected to complete with your actual income figures for that year, even though you only requested this to claim back tax paid on your maternity pay.
