How is statutory maternity pay calculated?

What counts as earnings?

Both entitlement to statutory maternity pay (SMP) and the rate payable depend on the employee's normal weekly earnings.

"Earnings" are calculated gross and include anything that is treated as earnings for NICs purposes — that is, any remuneration or profit derived from employment (regulation 20(2), SMP Regulations). This will include any overtime, commission and bonuses whether contractual or not, paid in the relevant period. A woman's SMP entitlement can be significantly increased if an annual bonus is paid during the relevant period for assessing normal weekly earnings. This is so even if the bonus is discretionary and/or relates to work done over a longer period (such as the past year, in the case of an annual bonus). The fact that it is an annual payment does not stop it forming part of the calculation of normal weekly earnings. What matters is that the payment is "derived from employment" and is paid in the relevant period (Campus Living Villages UK Ltd v HMRC and another [2016] UKFTT 738 (TC)).

It will also include:

• Statutory sick pay, maternity pay, paternity pay, adoption pay and parental bereavement pay.
• Arrears of pay following a tribunal's reinstatement order.
• Any amount payable following a claim for interim relief where the tribunal has ordered the contract to continue.
• Any amount payable under a protective award.
• Payments under employee share plans that are treated as "earnings" for NICs purposes; this covers many common types of payments under employee share plans.

Certain payments and benefits are excluded from the calculation. They fall into a number of broad categories, including:

• Payments in kind, such as accommodation and services.
• Certain non-cash vouchers including luncheon vouchers and childcare vouchers (see Childcare vouchers and earnings).
• Employer pension contributions.

Full details are set out in sections 25 to 27 and Schedule 3 of the Social Security (Contributions) Regulations 2001 (SI 2001/1004)).

Where part of the employee's salary has been sacrificed under a salary sacrifice arrangement (for example, in return for increased employer pension contributions or childcare vouchers), the sacrificed amount does not count as earnings for SMP purposes.

Calculating normal weekly earnings

Normal weekly earnings are calculated as a weekly average of the employee's total gross earnings from the employer and any associated employers during a reference period (the "relevant period").

As a rule of thumb, the earnings taken into account for monthly-paid employees are those set out on the last two pay slips before the end of the Qualifying Week (which is the 15th week before the EWC). For weekly-paid employees, the last eight pay slips are taken into account. Note that if the employee has given birth or, in some cases, been dismissed before the Qualifying Week, then the relevant period is calculated to the date of birth or dismissal respectively.

The relevant period

The relevant period ends with the last normal pay day on or before the end of the Qualifying Week and begins after the last normal pay day at least eight weeks earlier (regulation 21(3), SMP Regulations).

In other words, to find the relevant period:

• Take the last normal pay day on or before the end of the Qualifying Week. (If the employee has already given birth by then, take the last normal pay day before the week of birth.) That normal pay day is the last day of the relevant period.
• Count back eight weeks from that day.
• Take the last normal pay day before that date. The day after that pay day is the first day of the relevant period.

Note that, if no "normal pay day" is identifiable from the employee's contract or from the employer's normal practice, actual payment days are used (regulation 21(4), SMP Regulations).

Where there is a difference between the date an employer pays its employee and the date when the employee receives payment, "normal pay day" and "date of payment" is the date when the employer pays. The date on the payslip may be evidence of this. The date when the employee receives the money in their account is irrelevant. (Dahal v HMRC and another [2012] UKFTT 311 (TC)).

Method of calculation

The precise method of calculation varies depending on whether the employee is paid weekly, monthly or at other (possibly irregular) intervals

If the employee is paid monthly:

• The reference period should be two months and the earnings should be the last two pay slips on or before the end of the Qualifying Week.
• Divide the total earnings by the number of months.
• Multiply that figure by 12 to get a year's pay.
• Divide by 52 to arrive at normal weekly earnings

If the employee is paid weekly:

• The reference period should be eight weeks and the earnings should be the last eight pay slips on or before the end of the Qualifying Week.
• Divide the total earnings by the number of weeks to arrive at normal weekly earnings.

If the employee is paid at other intervals:

• Count the number of days covered by the reference period.
• Divide the total earnings by the number of days.
• Multiply by seven to arrive at normal weekly earnings.

(Regulation 21, SMP Regulations.)

If the employee is eligible for a pay rise between the start of the relevant period and the end of her statutory maternity leave, SMP must be recalculated as if the pay rise had taken place at the beginning of the relevant period. This means that her SMP must be increased retrospectively, or that she may qualify for SMP if she did not previously qualify (regulation 21(7), SMP Regulations).