Under current rules, if a woman is entitled to SMP and has a backdated pay rise that takes effect during or before the "relevant period" used to calculate her average weekly earnings, the rate of the SMP must be recalculated.

The "relevant period" is, the period between

• the first payday on or before the Saturday of the qualifying week (15th week before the expected week of childbirth), and
  
  
• the day following the pay day that falls at least eight weeks earlier.
  
  

That period normally encompasses eight weekly paydays or two monthly paydays. The woman's earnings for NICs purposes on those paydays are used to calculate her average weekly earnings (AWE). If a pay rise is backdated to a date that would have affected the earnings on any of those paydays if it had been applied at the proper time, her average earnings must be recalculated and, from her new AWE, her SMP payments adjusted accordingly.

As a result of the decision of the European Court of Justice in the case M J Alabaster v Woolwich plc and the Secretary of State for Social Security, this rule is to be amended under new Regulations that will take effect from 6 April 2005. See our Newsletters of 9 April 2004 and 24 September 2004 details of the ruling and its implications. Whether the new rules will have to be backdated to payments of SMP paid before April 2005 depends on the Court of Appeal's decision when the Alabaster case returns there in February 2005.

The new rule will says that a woman's SMP must be recalculated if she has a pay rise, backdated or otherwise, that takes effect between

• a date that falls during or before the relevant period and
  
  
• the end of her maternity leave, i.e. the end of her ordinary or additional maternity leave, as appropriate.
  
  

The length of that period could be anything between 38 and 69 weeks. Had they been at work, most women on maternity leave would have had one pay rise in that period of time, and some would have had two pay rises. Each of those pay rises, irrespective of their effective date, must be used to recalculate the woman's AWE and adjust her SMP payments.

This change, therefore, introduces a new routine to payroll work from 6 April 2005. Every time there is a pay rise, the circumstances of every woman who is either on maternity leave or has given notice to take maternity leave must be reconsidered. This involves

• recalculating her AWE as if the pay rise had been backdated to the relevant period
  
  
• recalculating her schedule of payments for the 26-week maternity pay period (MPP)
  
  
• if the MPP has not yet started, applying the new payments when it starts
  
  
• if the MPP has already started, increasing her payments from the next period and paying the arrears
  
  
• if the MPP has finished but she is still on maternity leave, paying the arrears
  
  
• in the case of an arrears payment, reclaiming the recoverable amount from payments due to the Accounts Office following the tax month in which it is paid.
  
  

These various situations are illustrated in the following example. A woman with low earnings is used for the example as this better illustrates the recalculation issues in the different situations.

Example
A weekly-paid woman is expecting a baby on 24 May 2005. Her qualifying week starts on Sunday, 6 February 2005. The relevant period spans the eight weekly paydays from Friday, 24 December 2004, to Friday, 11 February 2005. Her basic weekly pay is £;82.5

Her schedule of payments for the 26-week MPP (assuming it starts after 3 April 2005) is:

Situation 1 - pay rise before the start of maternity leave
The rate of pay for her job is increased by 3.0% from 1 February 2005. Her earnings in the relevant period are recalculated as if the pay rise had been backdated to include the relevant period. The effect is that her AWE is increased by 3.0% to £;115.1592. The new schedule of payments is:

These new rates are paid when her MPP commences.

Situation 2 - pay rise during the MPP
She starts her maternity leave on Monday, 16 May 2005. The rate of pay for her job is increased by 3.0% from 1 August 2005. Her earnings in the relevant period are recalculated as if the pay rise had been backdated to include the relevant period, giving the same schedule of payments as in Situation 1 above. At the time of the recalculation, she has already been paid 11 weeks of the SMP.

The payment due on 5 August 2005 is made at the new rate. The arrears payment for the first 11 weeks is £;33.22, i.e. 11 weeks at £;3.02, the difference between £;103.65 and £;100.63. This is also paid on 5 August 2005. The employer recovers 92% of the £;33.22 from the payment due to the Accounts Office on 22 August 2005.

Situation 3 - pay rise during additional maternity leave
This situation carries on from Situation 1, where there was a pay rise on 1 February 2005. There is a further pay rise on 1 February 2006, after the end of the MPP but before the woman returns from additional maternity leave. There is a further 3% increase to her hourly rate of pay.

Her earnings are again recalculated as if this new pay rise had been backdated to include the relevant period. The effect is that her AWE is increased by 3% to £;118.6140. The new schedule of payments is:

The arrears payment for the whole 26 weeks is £;65.66, i.e. 6 weeks at £;3.11, the difference between £;106.76 and £;103.65, plus 20 weeks at £;2.35, the difference between £;106.00 and £;103.65. This is paid on 3 February 2006. The employer recovers 92% of the £;65.66 from the payment due to the Accounts Office on 22 February 2006.

The principle of the new rules is, therefore, that a woman's SMP is to be calculated as if the payments made in the relevant period had been paid using the highest rates of pay that apply at any time during her maternity leave period. Note that there are no provisions to reduce the payments and recover SMP if the woman's rate of pay decreases during maternity leave.

There are still a number of issues to be resolved which may not become clear until the Regulations are published or the Inland Revenue publishes updated guidance in next year's E15 Supplement booklet. For example, the recalculation of AWE may not be as simple as increasing the original AWE by the percentage pay rise. There may a flat rate increase, or some of the original payments made in the relevant period may not be related in any way to the woman's rate of pay.

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