The New Year seems an appropriate time to think about new babies, so here we consider some money matters you might need to think about.
Statutory maternity pay v maternity allowance
Eligibility for statutory maternity pay (SMP):
- Earning at least £118 a week
- Give appropriate notice to employer with proof of pregnancy
- Have worked for your employer continuously for at least 26 weeks continuing into the ‘qualifying week’ (15th week before the expected due date)
So, this will apply to most salaried GPs. You will get 90% of your average weekly earnings before tax for the first 6 weeks and £148.68 per week (or 90% of earnings if that would be a lower figure) for the next 33 weeks.
If you are not the mother, you might be entitled to Shared Parental Leave pay (ShPP) – this is payable at £148.68 (or 90% of average earnings if lower). Effectively this means if you are both working, then after the first 6 weeks you can get the same benefit whichever of you stays at home with the baby.
SMP starts when you take your maternity leave, or automatically if you are off work with a pregnancy related illness in the 4 weeks before due date.
Eligibility for maternity allowance (MA - full rate £148.68/week or 90% of your average earnings if less, for 39 weeks):
- If you are employed but not entitled to SMP
- If you are self employed and pay Class 2 NIC
- If you’ve recently stopped working
In the 66 weeks before your baby is due you must have been:
- Employed or self employed for at least 26 weeks
- Earning £30 a week or more in at least 13 weeks
To get full maternity allowance you must have paid at least 13 weeks Class 2 NIC during that 66 week period – if not enough you only get a reduced amount of allowance (£27 per week for 39 weeks)
If you have not been working then you can still claim, if for at least 26 weeks in the last 66 weeks before your due date:
- You are married/civil partnership
- Not employed or self employed
- Take part in your spouse’s business but unpaid
- Your partner is self employed and paying Class 2 NIC
- You are not otherwise entitled to SMP or MA
In this situation you will only get 14 weeks of allowance
You will be able to register for child benefit when your baby arrives. Doing this gets them set up in the system so they get their national insurance number when they are of age. This also protects your State Pension if you do not have sufficient National Insurance contributions because of time out of work looking after a child under 12.
If either you or your partner (whether married, or civil partnership or living together) earn over £50k some of your child benefit will be recouped via the tax system. If either of you earn over £60k the whole amount will be recouped. Where you know that one of your incomes will always exceed £60k you can disclaim the benefit if you prefer that to having to pay it back.
Note that this can get complicated! If, for example, you are a single parent, but someone moves in with you, with whom you live as a married couple (but not necessarily the parent of the child), and they earn over £60k, then they can get taxed on your child benefit even if you do not share finances in any way.
Tax and children
Children are individuals for tax purposes from the moment they arrive, so they are entitled to a personal allowance just like anyone else.
This might tempt you to put money in the baby’s name so that the interest isn’t taxable. That won’t work if parents make gifts to children – it will still be taxed as the parents’ income if it exceeds £100. However, if grandparents want to make gifts to children, that’s fine – the income will be deemed to be that of the child. Often grandparents want to set up a fund to help children with university costs once they reach 18 – and this can be a tax efficient way of doing it.
If your parents are likely to leave you funds, consider if it may be more tax efficient to leave them to the next generation. Or perhaps a trust for a set period from which the child can benefit (perhaps to age 26 to cover further education) and then the capital can be distributed to either parent or child depending on the needs at that time? Depending on what is in the trust, this may give rise to a need for tax returns – so take advice first to make sure it is cost effective.
Your own tax position
If you are employed then the PAYE system should cope fine with your tax. Depending on the time of the year you stop working, you may get reduced tax or refunds of tax with your SMP. If, however, you are on a ‘non cumulative’ code, you will need to check carefully to make sure that not too much tax has been deducted by the end of the year.
Be careful if you have an underpayment of tax for an earlier year that HMRC ‘coded out’ for a tax year when you are not working. This amount that would otherwise have been taken out of your salary will fall due for payment. For example, an underpayment for 2018-19 would normally, if it is small enough, be adjusted from April 20 – so if you were expecting to not be working in 2020-21, you would have to pay the tax separately.
If you are self-employed, you will need to consider your payments on account. So, if you have completed your 2018-19 tax return, when you were fully self-employed, you’ll most likely have some substantial payments on account due for 19-20. If you have stopped work part way through 19-20, your taxable income is likely to be less, and therefore you may need to reduce your payments on account. Note that if you reduce them too much, you will get charged interest when the actual amount is known. Some prefer to pay the January figure, then deal with the next return early enough to know the total due before the July payment on account is due. Talk to your accountant about this.
You will still need to complete a tax return and a pension certificate each year if you are normally doing them (unless you time your leave for a precise tax year), so make sure you are up to date with your finances before baby arrives – you won’t want your accountant nagging you for information when you have a newborn to look after!
Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at email@example.com.