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It is likely to affect her first six weeks payments of SMP and, in other circumstances, could even affect a woman's entitlement to SMP.
The decision of the European Court of Justice (ECJ) in 2004 in the case of Alabaster v Woolwich plc and the Secretary of State for Social Security forced a change in the way that entitlement to SMP is calculated. A new requirement to recalculate a woman's SMP was introduced from April 2005. These rules do not apply to SAP or SPP.
Whether a woman is entitled or not to SMP is, among other factors, dependent on whether her average earnings in the "relevant period", i.e. the eight-week period counting backwards from her last payday falling in or before the "qualifying week", i.e. the 15th week before her baby is due, are at least as much as the NI lower earnings limit in force at the time. This is £;84 per week in the 2006/07 tax year. If she satisfies this and the other qualifying factors, she is entitled to be paid SMP for 6 weeks at 90% of the calculated average earnings, followed by 20 weeks at the lower of £;108.85 (for 2006/07) and 90% of average earnings.
If, having qualified for SMP, a woman becomes entitled to a pay rise that is effective on a date that falls
- prior to the eight-week relevant period, or
- between the start of the eight-week relevant period and the start of maternity leave, or
- at any time during the full period of maternity leave,
the woman's average earnings must be recalculated. If the effect of the recalculation means that
- the employee now qualifies for SMP,
- the rate of SMP for the first six weeks of the maternity pay period (MPP) is higher, or
- the rate of SMP for the remaining twenty weeks is higher,
the appropriate action must be taken to pay SMP or to pay any arrears due.
A woman's "period of maternity leave" is the period up to the day before she returns to work. If she is absent to the end of additional maternity leave, any pay rise during the full twelve months forces a recalculation. If she returns, say, after just fifteen weeks of ordinary maternity leave, any pay rise during the 15 weeks requires a recalculation, but any pay rise after she returns to work does not require a recalculation.
A "pay rise" in this context is not just a pay rise that she receives while she is still at work prior to the start of maternity leave. It is also includes a pay rise that is effective during maternity leave that she would have received if she had still been at work.
The period of time during which a pay rise may occur that could require a recalculation of average earnings is a year and a quarter, or even longer. During that period, almost all women will receive one pay rise; some women will receive two pay rises. A recalculation is required for each pay rise.
The procedure that must be followed whenever a woman is affected by a pay rise involves
- recalculating the woman's average weekly earnings as if the pay rise had been backdated to the relevant period
- recalculating her schedule of payments for the 26-week MPP
- if the MPP has not yet started, applying the new payments when it starts
- if the MPP has already started, paying arrears for weeks that have already been paid and increasing her payments from the next payment
- if the MPP has finished but she is still on maternity leave, paying the arrears for the whole of the MPP
- in the case of an arrears payment, reclaiming the recoverable amount from payments due to the Accounts Office in the tax month following payment.
Recalculation where a woman has two or more jobs with the same employer
Where a woman has two or more jobs with the same employer and the earnings from those employments are aggregated for NICs purposes, the level at which SMP is paid is based on the combined average earnings from those employments. If a woman has a pay rise in one of the employments but not in the others, only the earnings in the affected employment should be recalculated.
Recalculation brings a woman into entitlement
A recalculation could have the result that a woman, whose average earnings were too low for her to qualify for SMP, now comes into entitlement. Instead of SMP, she may have qualified for Maternity Allowance (MA). HMRC's instructions are that the employer may presume that she has received MA at the standard rate of SMP. The procedure is to work out 90% of average earnings, deduct the standard rate of SMP, and pay the difference for six weeks. However, if the reason that the woman did not receive SMP was low average earnings, the woman could not have received MA at the standard rate. If she did not receive any MA, or it was paid at a rate that was less than the standard rate of SMP, the employer should ask her to obtain a letter from Jobcentre Plus to confirm what she has received. When that information is available, the procedure is to work out the total amount of SMP she is entitled to, deduct the total MA she was paid, deduct any SMP that has already been paid to her, and pay the remainder.
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