The Chancellor Gordon Brown misled the Commons in the Budget two years ago when he claimed that maternity pay would be increased to £100 a week, an investigation by Payroll World magazine has concluded.
Many of the lowest paid workers will receive just £68 a week in the new rules for Maternity Pay, which came into effect on 6 April, says Payroll World technical editor Linda Pullan. This is actually lower than the previous £75 a week floor.
In Brown’s Budget speech on 7 March 2001, he declared: “Following the maternity review set up in last year's Budget under the leadership of the Secretary of State for Trade and Industry, maternity pay which is £60 will be increased in successive stages to £75 next year and the year after to £100 a week, as big a rise in two years as in the previous 40.”
The Chancellor added: “So to summarise these changes: families receiving the higher children's credit and maternity pay will be up to £2,240 better off.”
”When the speech was made, this sounded applaudable,” says Linda Pullan. “However now that the new measures have taken effect employers are literally counting the cost.”
Employees have had the expectation that they will all receive 90 per cent of average earnings for the first six weeks - which previously had a minimum floor of £75 per week, now removed - plus up to 20 weeks @ £100 per week.
In fact employees may find themselves receiving as little as £67.50 throughout the 26 weeks. This fall below the expected £100 is because the Inland Revenue introduced a subtle but important change in the statutory maternity pay (SMP) formula, which was initially overlooked by many employers. The change means that where 90 per cent of average weekly earnings are less than £100, 90 per cent is paid throughout the 26 weeks. The minimum average earnings to qualify for SMP was £75 per week for babies due up to 19 July 2003 and £77 per week thereafter.
Unfortunately for employers, because maternity pay is paid through the payroll, employees often view this shortfall as an error on the employer’s part and bitterly complain to the payroll department.
At the other end of the scale the Government, having removed the minimum floor on SMP, did not see fit to cap the 90 per cent of average earnings for the first six weeks, which can make maternity pay very generous for high earners.
”I recently came across two examples where clients both had pregnant directors whose average earnings were from £19,000 to £20,000 per week,” says Linda Pullan. “One of the directors had instructed the payroll department not to include her bonus in the calculations to keep the average earnings to a minimum and yet they still arrived at a figure in excess of £20,000 per week.
It seems particularly rather mean that a Government that promises to help people out of the poverty trap should penalise the lower paid,” she said.
There is also a ‘stealth tax’ through increased National Insurance Contributions. For those employees who qualify for £100 per week lower rate of SMP for up to 20 weeks they now face paying extra National Insurance, because the £100 is above the Earnings Threshold for National Insurance (£89 per week).
Previously the lower rate of SMP was always below the NI limit for both employees and their employers, so inevitably only the first six weeks at 90 per cent would potentially attract National Insurance. Of course, prior to 6 April’s NI changes, employees paid NI up to the upper earnings limit (UEL), however now they suffer a further 1 per cent charge on earnings over the UEL.
For employers, there is a further sting in the tail because not only has SMP increased from 18 to 26 weeks, but also employers remain liable to pay SMP even if the woman decides not to return to work. This has been standard practice for a number of years, but it is only now, when the lower rate due could be above the Earnings Threshold for NI, that the true cost hits home for employers, particularly in a year where the cost of employers’ NI has increased by 1 per cent.
To demonstrate how this has affected employees and employers let’s look at an example:
During 2002/03 employers paid SMP for 18 weeks at:
- Higher rate of 90 per cent of average weekly earnings for 6 weeks (minimum £75 per week)
- Plus lower rate of up to 12 weeks at £75 per week
- Consequently if 90 per cent was £200 per week, only the first six weeks attract NI, assuming no other contractual payments were due because £75 is below the Earnings Threshold for NI
Due to the restructuring of SMP for babies expected from 6th April 2003 and the increase to NI, the cost to employers liable to pay SMP during 2003/04 has increased.
- £200 (no minimum unless SMP begins before 6th April) for six weeks
- Plus £100 for up to 20 weeks (if 90 per cent is less than £100 pay 90 per cent throughout)
Consequently due to the increase in the rate of SMP the whole 26 weeks attracts National Insurance regardless of whether or not the woman returns to work for her employer.
When Gordon Brown announced his changes in March 2001, he emphasised the importance of families, he used the word ‘children’ more than 25 times. “We can do more to help mothers and fathers balance work and family responsibilities.
”Indeed, we want to make it easier for mothers to make the choice to stay at home after their child is born and for much longer than previously,” he said.
Perhaps the then Opposition Leader William Hague was more astute than people gave him credit for when he told Labour MPs that they had been duped in believing Mr. Browns Budget promises. He stated: “For example, when he talks about helping women and children they will remember that he scrapped the married couples’ allowance.
”People will be suspicious about some of the claims he has made today.”