My VIP Tax Team question of the week: Maternity Leave & Pension Contributions

Q. My employee is going on maternity leave. What happens to her pension contributions while she is on maternity leave? 

A.) Pension contributions during maternity leave are governed by the Maternity Equality Rule at Section 75 of the Equality Act 2010 –

https://www.legislation.gov.uk/ukpga/2010/15/section/75

Subsection 1 of the legislation says:
(1) If an occupational pension scheme does not include a maternity equality rule, it is to be treated as including one.

Subsection 7 of the legislation says:
(7) This section does not require the woman’s contributions to the scheme in respect of time when she is on maternity leave to be determined otherwise than by reference to the amount she is paid in respect of that time.

So

Statutory Maternity Pay (SMP) & Pension Contributions With a Salary Sacrifice

If the employee has entered into a salary sacrifice agreement to legally give up part of her pay in return for pension contributions:

for the duration of the maternity pay period (maximum of 39 weeks), the employer continues to pay the employer pension contributions under the salary sacrifice agreement based on the employee’s usual pay, not based on the amount of SMP being paid. SMP is not salary, it is a statutory payment.

A salary sacrifice agreement is to sacrifice salary, not to give up a statutory payment. So, the employee receives her full Statutory Maternity Pay (SMP), with no deduction for pension contributions.
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42775 says:
“Payments made under successful salary sacrifice arrangements continue to be regarded as employer contributions and not taxable on the employee.”

Statutory Maternity Pay (SMP) & Pension Contributions Without a Salary Sacrifice
If the employee has not entered into a salary sacrifice agreement:

for the duration of the maternity pay period (maximum of 39 weeks), the employer continues to pay the full employer pension contributions based on the employee’s usual pay (not her SMP). There is no change to the employer contributions. However, the employee’s pension contributions are based on her new gross payment (even if that is just SMP) during the MPP, for the duration of the MPP.

If the employee has a relief at source pension, the new employee contribution amount would be deducted from the employee’s net payment. The tax relief will be given by the pension provider as usual.

If the employee has a net pay arrangement pension, the new employee contribution amount would be deducted from the employee’s gross payment (even if that is just SMP), for tax purposes only, so that they get their tax relief on their pension contributions through the payroll as usual. Class 1 NIC would still be charged on the full gross amount of SMP.

SMP & Pension contributions after the MPP of 39 weeks

If the employee takes more than 39 weeks of maternity leave, the pension contributions (both employee and employer) will stop altogether after the maternity pay period of 39 weeks. During the unpaid part of the maternity leave the employee is effectively on unpaid parental leave, so for any pension scheme both the employee’s and the employer’s pension contributions stop altogether until the employee receives pensionable pay again.

Employee Not Eligible For SMP From Employer

https://www.legislation.gov.uk/ukpga/2010/15/section/75

Subsection 8 of the legislation says:

(8) This section, so far as relating to time when she is on ordinary maternity leave but is not being paid by her employer, applies only in a case where the expected week of childbirth began on or after 6 April 2003.

If the employee is not eligible for SMP from her employer, her employer should give her an SMP1 form within 7 days of their decision. This will help Jobcentre Plus to decide if the employee is entitled to Maternity Allowance.

The employer would continue to pay the employer pension contributions for the first 26 weeks of the maternity leave (Ordinary Maternity Leave), even if no SMP is due.

So again, if salary sacrifice, the employer continues to pay the employer pension contributions based on the employee’s usual pay and under the terms of the salary sacrifice agreement. If no salary sacrifice, the employer continues to pay the full employer pension contributions based on the employee’s usual pay. There is no change to the employer contributions. There would be no employee contributions, as the employee is not receiving any pay/SMP from her employer.

In all scenarios, usual pay is defined as your pay before the maternity pay period plus any pay increases from anytime between the start of the 8 week relevant period for SMP and the end of the Statutory Maternity leave.

The Government Guidance can be found at:
https://www.moneyhelper.org.uk/en/family-and-care/becoming-a-parent/maternity-and-paternity-leave-and-your-pension

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Payroll Advisor - Tax
0844 892 2470

Vanessa worked for HMRC for 30 years. She began her career with HMRC in the processing/service office. From 2001 Vanessa was a Compliance Caseworker within Small and Medium Enterprises. Vanessa visited a wide range of employers and contractors to check that they were meeting their tax and National Insurance (NIC) obligations with regard to payroll, expenses, benefits and the Construction Industry Scheme (CIS).

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