21 Salary Sacrifice and Maternity Leave

Transcription

1 21 Salary Sacrifice and Maternity Leave Scope of this chapter 21.1 This chapter describes the way in which the cost of salary sacrifice arrangements is likely to impact on employers during a woman s maternity leave period. Salary sacrifice arrangements must be clearly understood by both the employer and the employee. Her Majesty s Revenue & Customs (HMRC) will not consider a salary sacrifice arrangement to have been made unless the employee s contract of employment has been amended to reflect the detail of the arrangement. Key points relating to salary sacrifice and maternity leave 21.2 Key points on salary sacrifice and maternity leave are summarised below. (a) A salary sacrifice arrangement only exists when an employee gives up the right to some cash pay. Usually the sacrifice is made in exchange for the employer s agreement to provide the employee with a non-cash benefit. (b) (c) (d) (e) (f) Salary sacrifice is not a matter of tax law but of employment law. HMRC s interest in salary sacrifice arrangements is determining how the income tax and National Insurance contributions (NICs) legislation applies to the various elements in the employee s remuneration package. A change in the law, effective for all women whose babies were due from 5 October 2008, means that women are entitled to all of their contractually agreed non-cash benefits during their maternity leave periods (ordinary maternity leave (OML) and additional maternity leave (AML). This may be up to 52 weeks of benefit. Employers and employees sometimes believe that they can opt out of a salary sacrifice arrangement at any time but that is not normally the case. The contract of employment has to be amended to make any such change effective. Except for statutory deductions such as tax, NICs and student loan deductions or deductions made on the employee s instructions (e.g. trade 21/1 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 1

2 JOBNAME: 6275 Payroll Managem PAGE: 2 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 56190E9B 21.3 Salary Sacrifice and Maternity Leave (g) (h) union dues), employers may not make any deductions from statutory maternity pay (SMP) so no salary sacrifice arrangement can be applied to a SMP payment. The changes that became effective on 5 October 2008 mean that women are entitled to have their contractual holiday entitlements accrue throughout all 52 weeks maternity leave. Employers are obliged to make occupational pension contributions as though the employee was still working, during any period of paid maternity leave (SMP or OMP). If the employee does not qualify for SMP, the employer is still obliged to make occupational pension contributions as though she was still working, during any period of unpaid OML. The changes that became effective on 5 October 2008 do not affect this, already existing, situation. Salary sacrifice arrangements What is salary sacrifice? 21.3 A salary sacrifice arrangement comes into being when an employee gives up the right to receive part of the cash pay as agreed in the contract of employment. The amount given up or sacrificed is normally exchanged for a benefit supplied at the employer s expense. The value of the benefit provided in exchange for the sacrificed amount may be the same or it may be different. The arrangement is confirmed by the employee s contract of employment being amended accordingly. EXAMPLE Amanda s contract of employment states that her annual salary is 18,000 with no benefits in kind. She receives her pay once per calendar month. Amanda belongs to her employer s money purchase pension scheme under the automatic enrolment regulations. She does not make any tax-free charitable donations. Her tax code is 1150L She later agrees to accept medical insurance, supplied by her employer, valued at 1,000 per year, in exchange for a contractually-agreed reduction in salary of 1,000. Her contract of employment must be amended to reflect these revised terms and conditions. Assuming that Amanda s gross pay for the tax year is 17,000, it should be borne in mind that it will be 17,000 that appears on her P60 end-of-year certificate. q PM Issue 33 21/2 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 2

3 JOBNAME: 6275 Payroll Managem PAGE: 3 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: Salary Sacrifice and Maternity Leave 21.4 It is possible to make use of the original, now notional, salary value of 18,000 to determine other rates of pay such as overtime, bonuses, commissions, occupational pension contributions etc if that is the employer s or pension provider s policy. Amanda must understand that she has no automatic right to return to her previous level of pay, even if she gives up the medical insurance benefit. A salary sacrifice is not effective if, in practice, the arrangement allows the employee to continue to be entitled to the higher level of cash remuneration. So, if in the above example, Amanda had asked her employer to use part of her pay to finance a medical insurance scheme for her, the arrangement is not a true salary sacrifice arrangement and will not meet with HMRC s requirements. Government has realised that it is losing out by not being able to collect income tax and NICs on sacrificed salaries as it would if the sacrifices were not made. It has therefore proposed that some benefits in kind should be taxed including some that are currently exempt if they are provided via a salary sacrifice scheme. Government intends to exclude the following benefits from the proposal because it still wishes to encourage employers to provide them: (a) employer-provided pensions; (b) employer-provided pension advice (from 2017); (c) employer-supported child-care and work-place nurseries; (d) cycles and cycle safety ware. Under the proposal, the taxable benefits, not included in the above list would be taxable at the greater of the value of the benefit or the amount sacrificed. With regards to the tax-exempt benefits, the value of the salary sacrificed to provide them would be taxed. Any benefits provided under these arrangements would have to be reported on Form P11D. Basically, the employee would be taxed on the sacrificed salary rather than the value of the benefit rendering the salary sacrifice arrangement to be futile. HMRC requirements 21.4 HMRC will recognise that a salary sacrifice arrangement has been made when: (a) it is the revised salary (e.g. 17,000 per year, in the above EXAMPLE) that is treated as received for tax and NICs purposes; (b) the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration. 21/3 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 3

4 JOBNAME: 6275 Payroll Managem PAGE: 4 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 5164AEF Salary Sacrifice and Maternity Leave HMRC will not normally comment on a proposed salary sacrifice arrangement because such arrangements are not a matter of tax law but employment law. To remain compliant with HMRC guidance it is common for an employer to instruct the employee who agrees to a salary sacrifice arrangement that the arrangement must remain in place for a minimum period of twelve months, unless the employee undergoes a life-style change. Employers are not permitted to allow any employee to enter into a salary sacrifice arrangement that will reduce the employee s gross pay to a level that is below the national minimum wage (NMW), 6.95 per hour from 1 October 2016 (rising to 7.05 per hour from 1 April 2017) or the National Living Wage ( 7.20 per hour for those aged 25 or more, introduced from 1 April 2016, rising to 7.50 per hour from 1 April 2017), apart from accommodation ( 5.35 per day or 7.45 per week from 1 October 2015). The value of benefits in kind do not count towards the NMW or NLW. Advantages and disadvantages of salary sacrifice arrangements 21.5 Using the above Example again, Amanda originally received gross pay of 18,000 that would attract Class 1 NICs for both her employer and her. With the salary sacrifice arrangement in place it is the reduced amount of 17,000 that attracts the Class 1 NICs. As Amanda pays category A NICs, in the 2017/18 tax year she will save 120 in employee NICs. Her employer will save 138 in employer Class 1 NICs but this saving will be wiped-out by the 138 that will have to be paid in Class 1A NICs on the medical insurance benefit. The only advantage for the employer is the fact that the Class 1A NICs are not payable until 19th (or 22nd) July following the end of the tax year while the secondary Class 1 NICs are payable each tax month. In the 2017/18 tax year, Amanda would have paid 1,300 tax on her original 18,000 but will only pay 1,100 on her 17,000 salary: a saving of 200 which will be later wiped-out when her medical insurance benefit affects her tax code. Some benefits do not attract income tax or NICs (e.g. childcare vouchers up to the value of 55 per week; 243 per calendar month, for basic rate tax payers. From 6 April 2011, higher rate and additional rate taxpayers who join a childcare voucher scheme continue to get tax relief for childcare vouchers, as above, but only at the basic rate of income tax. The employer may think that an alternative possibility would be to offer to act as an agent for a childcare voucher company and take the employee s instruction to deduct 55 per week from the employee s gross pay (i.e. as a pre-tax deduction) to finance the cost of the childcare vouchers. However, this is not possible because it is only when childcare or childcare vouchers are provided by the employer that there is a NIC-free and tax-free benefit. If the employee simply instructs the employer to deduct 55 per PM Issue 33 21/4 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 4

5 JOBNAME: 6275 Payroll Managem PAGE: 5 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 63D89A1A Salary Sacrifice and Maternity Leave 21.7 week to finance the cost of the childcare or childcare vouchers, the deduction must be deducted after the gross pay has been considered for NICs and income tax (i.e. a net pay deduction). It is the benefit that is tax and NIC-free, not the money that finances the benefit. Using the above EXAMPLE again, it will be 17,000 gross pay that appears on Amanda s P60 Certificate at the end of the 2017/18 tax-year which could have an adverse effect if Amanda needs a mortgage and requires an income of 18,000 per year to achieve it. If Amanda becomes pregnant, her average pay calculations will be based on her monthly gross pay of 1,416.67, not the pre-salary sacrifice amount of 1,500 per month. Conversely, the salary sacrifice value may entitle Amanda to more family tax credit or child tax credit due to the reduced gross pay. SMP and non-cash benefits 21.6 The Maternity and Parental Leave etc Regulations 1999 (SI 1999 No 3312) provided for the introduction of a woman s right to continue to receive any non-cash benefits to which she was entitled, under the terms of her contract of employment, during her ordinary maternity leave (OML) period, currently the first 26 weeks of her maternity leave (ML), but not during her additional maternity leave (AML) period. Legislative changes affecting the supply of cash and non-cash benefits during maternity leave 21.7 The result of the case, Equal Opportunities Commission v Secretary of State for Trade & Industry, caused some changes to be made to the Sex Discrimination Act 1975 (SDA 1975), the Maternity and Parental Leave etc Regulations (SI 1999 No 3312) (the 1999 regulations ) and the Paternity and Adoption Leave Regulations (SI 2002 No 2788) (the 2002 regulations ). The Sex Discrimination (Amendment of Legislation) Regulations 2008 (SI 2008 No 963) amend the SDA 1975 provisions regarding sexual harassment and pregnancy discrimination. Sub-sections 3A(1) and 3A(2) of the SDA 1975 were amended to remove the requirement for a comparator who was not pregnant or on ML. This amendment came into force on 6 April Section 6A of the SDA 1975 was also been amended and a new clause was added so that, where a discretionary bonus becomes due, that a woman on maternity leave would have received if she had been working has become payable although the woman is on compulsory maternity leave. This change became effective for all women with babies due on 5 October 2008 or later. Further, a woman may be able to bring a 21/5 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 5

6 JOBNAME: 6275 Payroll Managem PAGE: 6 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 608ADFCF 21.8 Salary Sacrifice and Maternity Leave sex discrimination case to tribunal if the time spent on compulsory maternity leave has not been included in the bonus period calculation. The Maternity and Parental Leave etc and the Paternity and Adoption Leave (Amendment) Regulations 2008 (SI 2008 No 1966) (the 2008 regulations ) amend the 1999 and 2002 regulations and affect entitlements to contractuallyagreed rights during additional maternity leave (AML) (and additional adoption leave (AAL)). Regulation 9 of the 1999 regulations, regarding cash pay, has not changed so a woman on ML is still not entitled to any salary while on ML, but under regulations 9 and 17 her entitlement to any contractually agreed benefits in kind remain intact throughout the entire ML period. Basically, from 5 October 2008, there is no longer any distinction between the contractual rights of employees on OML and those on AML. The same applies to OAL and AAL. From 3 April 2011, SPL was renamed as ordinary statutory paternity leave and additional statutory paternity leave. The partner must take a minimum of two weeks leave. The couple must jointly complete a Form SC7 that the partner will submit to his/her employer. The partner may take the additional paternity leave (APL) at any time after the mother has returned to work but must take it before the baby s first birthday. As above, any contractually agreed benefits remain intact during the APL period. A particularly significant ruling was made at a recent Employment Appeal Tribunal (EAT), in the case of Peninsula Business Services v Donaldson, where it was declared that it is not discriminatory to discontinue the benefit of employer provided childcare vouchers during a woman s period of maternity leave. As stated above. regulation nine states that a woman is not entitled to any elements of her normal cash pay during maternity leave. The EAT decided that because the childcare vouchers in question were provided due to the employee receiving the childcare vouchers via a salary sacrifice arrangement, the childcare vouchers constituted part of the remuneration package and so could be withdrawn during the maternity leave period. The judge, J Langstaff, concluded that the vouchers represented part of the salary because the cash had been substituted with the childcare vouchers via the salary sacrifice. It must be noted that any current, contractual arrangements for childcare vouchers to continue during maternity leave must be upheld until the contract is amended by the mutual consent of the employer and employee. This recent decision could be applied to other benefits that are provided via a salary sacrifice arrangement if the contract of employment is suitably worded. As a result of this case the HMRC guidance on the continued provision of benefits made available via salary sacrifice arrangements should be amended. Return to work rights 21.8 Regulation 18A of the 1999 regulations has been amended so that a woman returning from AML retains her rights to seniority, pension and any similar rights PM Issue 33 21/6 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 6

7 JOBNAME: 6275 Payroll Managem PAGE: 7 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 66ECEB77 Salary Sacrifice and Maternity Leave 21.9 similarly to a woman returning from OML. (Similar changes to the 2002 regulations in respect of OAL and AAL have been made by the 2008 regulations.) No other return-to-work rights were changed by the 2008 regulations. From April 2011, an employee returning from a single period of APL is entitled to return to the same job as she/he was employed before taking the leave. SMP and SShPP 21.9 (Note that there have been no changes to the qualification and calculation rules for SMP.) Statutory shared parental leave (SPL) and statutory shared parental pay (SShPP) were introduced for the parents of babies born on or after 5 April The leave and pay are available to parents if the mother decides to forsake some of her maternity leave and pay. SPL and SShPP are also available to adoptive parents. The mother is obliged to take two weeks SML or four weeks SML if she works in a hazardous environment. SMP etc is discussed in detail in CHAPTER 9 (STATUTORY PAYMENTS FOR SICKNESS, MATERNITY, ADOPTION AND PATERNITY ETC). From 5 October 2008, SMP continues to be paid throughout the OML period (weeks 1 to 26) and for the first thirteen weeks of the AML period (weeks 27 to 39). No further SMP is due for the remaining thirteen weeks of the AML period (weeks 40 to 52). To qualify for SMP a woman must: (a) (b) (c) be in her employment at the end of the qualifying week (QW), i.e. the 15th week before the baby is due; and have been in her present employment for 26 weeks by the end of the QW; and have average weekly earnings not lower than the lower earnings limit (LEL) for Class 1 NICs (i.e. 112 per week in 2016/17) in force at the end of the QW. To calculate the SMP entitlement, obtain the woman s average weekly earnings (i.e. gross, NICable pay) during the set period (generally the eight weeks, ending with the QW) as illustrated in the following example. EXAMPLE Zara earns basic pay of 350 per week. During the set period she has also earned 60 overtime and received a bonus of 100. q 21/7 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 7

8 JOBNAME: 6275 Payroll Managem PAGE: 8 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 5BEFFFE Salary Sacrifice and Maternity Leave Her average pay for the set period is 350 8= 2, = 2,960 8 = 370. Zara s SMP entitlement is: (a) (b) 90% of 370 = 333, for the first six weeks of the maternity pay period; and per week (in 2017/18) for the following 33 weeks. (She and her partner may choose to share some of her SML and SMP as SPL and SShPP.) The total SMP, if she chooses to take all of it, is 6, and her employer can recover 92% ( 6,118.31)) from HMRC. If Zara s employer was classed as a small employer for SMP purposes (i.e. the employer s gross NIC liability for the previous tax year was no more than 45,000), the employer could recover 103% of the SMP, i.e. 6, Salary sacrifice and SMP Zara used to earn 405 per week until she agreed with her employer that her contract of employment would be amended to include a salary sacrifice arrangement comprising gross pay of 350 per week and employer-supplied benefit of childcare vouchers to the value of 55 per week (being NIC- and tax-free, available to Zara as she is a basic rate tax payer). When Zara became pregnant her SMP was calculated as in the above EXAMPLE. Note that the SMP is now calculated using her weekly, gross basic pay of 350, not 405 which was the pre-salary sacrifice arrangement, gross basic pay. Yvonne also used to earn 405 per week but she agreed to a salary sacrifice arrangement whereby her gross pay would be reduced to 305 and the employer would supply her with childcare vouchers worth 100. Yvonne is liable for tax and Class 1 NICs on the non-exempt element of the childcare vouchers, i.e. 45. Her gross pay for Class 1 NICs is therefore 305. Her average weekly earnings for SMP calculation is based on her gross NICable remuneration, which are 305 per week. Tax-free childcare scheme The current scheme for the provision of childcare free of tax and NICs provided by the employer as described in 21.10, above is to be withdrawn. The new scheme will be delivered to parents directly by the government via HMRC in partnership with National Savings and Investments (NS&I). PM Issue 33 21/8 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 8

9 JOBNAME: 6275 Payroll Managem PAGE: 9 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 4DBB480D Salary Sacrifice and Maternity Leave Under this new scheme parents will be able to claim tax relief, at 20%, on amounts up to 10,000 worth of childcare per year ( 2,000 income tax). This scheme was due to be phased in from autumn 2015, delivered by HMRC in partnership with National Savings & Investments (NS&I). This was opposed by a number of organisations currently involved with employer supported childcare schemes but the legal challenges were dismissed by the Supreme Court. The court suspended the new scheme s development until the legal position was clarified. Government recently announced that the new tax-free childcare scheme is to be introduced during As the new scheme is phased in, the existing scheme will be phased out. As soon as the new scheme is introduced the existing scheme will be closed to new entrants. Existing scheme users will be able to continue in the existing scheme until their requirement for childcare, supplied in this way, is no longer required, as long as they continue to work for the same employer and the employer continues to offer the benefit. More details on the introduction of the new scheme can be found at will no longer play any direct part in the supply of tax-free childcare arrangements except for the existing supply of workplace nurseries. Under the new scheme there will be no tax and NICs advantage via employment so it is very likely that salary sacrifice schemes arranged for childcare purposes only, will die out. As stated in 21.3 above there is no legislation stating that an employee has an automatic right to the pre-salary sacrifice level of income although this may be achieved via negotiation. Salary sacrifice, SMP and non-cash benefits Employers sometimes mistakenly believe that they, or the employee, can opt out of a salary sacrifice arrangement at any time. As salary sacrifice arrangements are contractually binding on both parties, they must both agree that such an arrangement can be terminated. Due to the implementation of the legislative changes that came into effect from 5 October 2008 women are entitled to receive all of their contractually agreed non-cash benefits during the full period of maternity leave (up to 52 weeks). No contrary contractual agreement between the employee and the employer can override this requirement but see also the conclusion reached in the Peninsula Business Services v Donaldson case in 21.7 above. The only deductions that can be made from SMP (and SAP, SPP and SShPP) are the statutory deductions of NICs, PAYE and student loan deductions and any other employee authorised deductions such as trade union subscriptions or charitable donations. The employer may not make any deductions from the employee s SMP, SAP, SPP or SShPP to finance any salary sacrifice arrangement 21/9 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 9

10 JOBNAME: 6275 Payroll Managem PAGE: 10 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: AFB Salary Sacrifice and Maternity Leave that is in place. This means that, where an employer has agreed to supply a non-cash benefit, such as 55 worth of childcare vouchers per week, he must continue to do so throughout the employee s ML, SAL, SPL or SShPL even if the arrangement is a discretionary arrangement and not a contractually binding arrangement. Although employers may generally withdraw discretionary noncash benefits it would be unlawful, under the terms of the Sex Discrimination Act 1975, to do this if the employee is on maternity leave, adoption leave, paternity leave or shared parental leave. If the employee takes her full entitlement of leave this would cost the employer 55 x 52 = 2,860 for a woman on ML which will be an on cost to the employer as he has no means of recovering this cost from any source. Below is an example of an extract of a typical woman s contract of employment showing her entitlements to salary and non-cash benefits during OML and AML. Her childcare vouchers are supplied as a result of a salary sacrifice arrangement. She receives eight days annual holiday in excess of the statutory entitlement. Entitlements Baby due before 05/10/2008 OML AML Entitlements Baby due on or after 05/10/2008 Contract of employment OML and AML Weekly basic pay 400 No No No London weighting allowance 50 No No No Childcare vouchers 55 per week Yes No Yes Company car Yes No Yes Health insurance Yes No Yes Pet insurance Yes No Yes Statutory holiday entitlement Contractual holiday entitlement (8 days) Yes Yes Yes Yes No Yes What if an employee does not qualify for SMP? A pregnant employee who supplies a certificate MATB1 to her employer but either has not worked for her current employer for 26 weeks by the end of the PM Issue 33 21/10 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 10

11 JOBNAME: 6275 Payroll Managem PAGE: 11 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 7CA27231 Salary Sacrifice and Maternity Leave qualifying week or has average weekly earnings below the LEL for NICs will not qualify to receive SMP. Nevertheless, if she is entitled to any non-cash benefits under the terms of her contract of employment she will continue to be entitled to them for the duration of her ML (OML and AML). Salary sacrifice, occupational maternity pay and non-cash benefits Where an employer pays occupational maternity pay (OMP), a salary sacrifice arrangement may be applied to the occupational element of the maternity pay but must not impact on the SMP element. EXAMPLE Betty earns 350 per week and receives 55 worth of childcare vouchers via a salary sacrifice arrangement. Her employer pays OMP of: (a) (b) (c) 90% of average pay, for the first six weeks; 90% of gross basic pay for the next 20 weeks; half gross basic pay or (in 2017/18), whichever is greater, for the remaining 26 weeks (i.e. the AML period). SMP is offset against the OMP. Betty s employer may continue to apply the salary sacrifice arrangement to her OMP to finance the provision of the childcare vouchers during her ML so long as the sacrifice does not reduce the OMP to a level below her SMP entitlement. Betty s pay record is exactly the same as Zara s, in the previous EXAMPLE so Betty s OMP will be: = 1, = 6, = 4,550 Total OMP = 12,848 The SMP element is offset against the OMP, so Betty s employer will be able recover 92% of Betty s total SMP entitlement of 6,650.34, which is 6,118.31, from HMRC. It will cost Betty s employer 6, to finance her OMP. Betty s employer will only have to finance the cost of the childcare vouchers for the first six weeks of Betty s ML an additional cost of /11 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 11

12 JOBNAME: 6275 Payroll Managem PAGE: 12 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 4E0433F Salary Sacrifice and Maternity Leave What if childcare is not required during an employee s ML period? It is possible for an employee to opt out of receiving a non-cash benefit at any time so if Betty in the above EXAMPLE decides that she will not require a childcare service while she is on ML she can advise her employer that she will not require any more childcare vouchers from the start of her ML period. Betty must recognise that if she still does not require the childcare facility when she returns to work, after her ML, she will have no automatic right to receive her original pay of 405 per week. A return to her original salary of 405 per week could be achieved if Betty declared that she has had a life changing event i.e. the birth of her new baby and that the childcare benefit was no longer required. Her employer could then, effectively, increase Betty s salary back to its original level. Betty s employer must also be aware that he is not permitted to oblige her to give up her non-cash benefit if she wishes to continue to receive it. Holiday entitlement With effect from 5 October 2008, women are entitled to accrue their full statutory and contractual holiday entitlement even if they stay on ML for the full 52 weeks. The Working Time Regulations 1998 (SI 1998 No 1833) do not allow for statutory holiday entitlement to be carried over to a following holiday year. This means that employees and employers will have to plan the employee s actual holiday leave carefully. If she is due to start her ML part way through a holiday year she may be able to take her accrued holiday entitlement before commencing her ML. She will accrue holiday leave during her entire ML and should then be able take the holiday entitlement that she has accrued in the second holiday year at the end of her ML. One way to approach a pregnant employee s holiday entitlement is illustrated in the example below. EXAMPLE Daphne works five days each week (Monday to Friday). At Daphne s place of work the holiday year is 1 January to 31 December. Under the terms of her contract of employment Daphne is entitled to 28 days (5.6 weeks) holiday plus the 8 English bank holidays, i.e. 36 days holiday, each holiday year. Daphne s holiday entitlement therefore accrues at the rate of 3 days per month. Daphne s baby is due on 2 July q PM Issue 33 21/12 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 12

13 JOBNAME: 6275 Payroll Managem PAGE: 13 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 50B5191F Salary Sacrifice and Maternity Leave Daphne has informed her employer that she intends to start her ML on Sunday 29 May. By the end of May Daphne will have accrued a total of 15 days holiday entitlement but she will have had 5 days bank holidays (New Year s Day, Good Friday, Easter Monday, May Day and the Spring Bank Holiday) and one week s holiday that Daphne took during April. The remaining holiday accrual is therefore 5 days. With her employer s agreement Daphne can take these 5 days holiday, commencing on Monday 22nd May. Daphne will continue to accrue holiday entitlement for the rest of that holiday year, while she is on ML so that by the end of December a further 21 days holiday entitlement will have been accrued. Daphne s employer can permit her to carry forward the contractual element of her holiday entitlement to the following year but he is not obliged to do so. (Daphne s contract of employment should state whether her employer permits the untaken contractual holiday leave to be carried forward.) As Daphne s total holiday entitlement is made up of 28 statutory days (including the bank holidays) and 8 contractual days, Daphne s employer may permit her to carry forward the 8 contractual days to the following holiday year or make a payment in lieu of the untaken contractual holiday leave, but the 13 remaining statutory days will be lost. Daphne s employer is not permitted to make a payment to cover the lost statutory holiday entitlement. Her employer could have permitted Daphne to take more holiday than she had actually accrued before the ML commenced so that she would not lose any or as much holiday leave at the end of the holiday year. Daphne s holiday will begin to accrue again, as described above, at the beginning of the second holiday year, on 1 January 2018, and will continue until Daphne s return to work at the end of her ML. Her employer may allow Daphne to take this accrued holiday leave at the end of the ML period. Pension contributions It is the Social Security Act 1989, schedule 5, the Employment Rights Act 1996 and the Maternity and Parental Leave etc Regulations 1999 (SI 1999 No 3312) that govern the way in which employers and employees occupational pension 21/13 PM Issue 33 Kerrypress Ltd Typeset in XML A Division: chap21 F Sequential 13

14 JOBNAME: 6275 Payroll Managem PAGE: 14 SESS: 3 OUTPUT: Tue Jan 10 15:52: SUM: 4CE7197C Salary Sacrifice and Maternity Leave contributions are calculated during ML. The regulations that came into force on 5 October 2008 do not change any of these, pre-existing provisions. The introduction of automatic enrolment workplace pension schemes also does not have any effect on the regulations that came into force on 5 October References The regulations regarding SMP are discussed in detail in CHAPTER 9 (STATUTORY PAYMENTS FOR SICKNESS, MATERNITY, ADOPTION AND PATERNITY ETC). HMRC will not comment on an employer s proposed salary sacrifice scheme but does offer general guidance on such schemes. (1) Salary Sacrifice (2) Amendments to the Sex Discrimination Act PayrollProfessional, June (3) The impact of tax-free childcare, Professional in Payroll, Pensions & Reward, June (4) Salary sacrifice consultation, Professional in Payroll, Pensions & Reward. PM Issue 33 21/14