Why spreading your Maternity Pay makes you better off
Some employers offer the option to spread or ‘smooth’ maternity pay evenly over your entire maternity leave. The idea is that you get the same total amount, only spread evenly over each month rather than the typical decreasing monthly amounts. This makes it easier for you to budget throughout your maternity leave.
Here we see that this is not really true – there is another benefit to spreading: Your take-home pay is not only spread; it is often more as well. Sometimes 10% more.
Just give me the answer: Yes – you could actually get more money:
If you are given the option to spread your maternity pay, probably you will be financially better off by doing so (unless you qualify for Universal Credit), because deductions from pay (e.g. tax and student loan repayments) may be lower.
Working out exactly how much is complicated and depends on things you wouldn’t expect, like when in the year your baby is born. That’s why we built the maternity.money calculators, to give you an answer that is specific to your circumstances.
One small note of caution: any financial upside of spreading your maternity pay will almost certainly be cancelled out if you end your maternity leave early. If you think there is a chance you will go back to work sooner than the period you have spread your pay over, you should probably not spread your pay.
What do we mean by spreading maternity pay?
Most occupational maternity pay schemes start with a relatively high level of pay that steps down at various points.
For example, the main NHS scheme is:
- 8 Weeks Full Pay
- 18 Weeks Half Pay Plus Statutory Maternity Pay (£148.68)
- 13 Weeks Statutory Maternity Pay (£148.68)
- 13 Weeks Unpaid
However, many NHS trusts offer the option to “spread” this pay evenly over the 52 weeks maternity leave. The idea is you total up the gross pay you would receive, and then divide it equally over 12 months.
So let’s look at an example for a Made Up Mum:
- Maternity leave for 52 weeks from 30/9/2019
- Salary: £17,000
- Pension: 9.3%
- Maternity Policy as above
Because we are going to be looking at net pay it is important to look at pay across the whole tax year (April to April). Because our maternity leave falls across two years, we will look at Total Net Pay across those two tax years (19/20, 20/21).
|Total Gross Pay||27228||27228|
By spreading, you get less gross pay at the start of maternity leave and more at the end. But the total gross pay whether you smooth or not remains the same (£27,228).
What about take home (net) pay?
So, the total gross maternity pay is equal, what about take home pay? Because the tax system treats income differently depending on when it turns up, things look different for take home pay.
First let’s take our Made Up Mum and see if there is a difference:
|Total Net Pay||£ 22,695||£ 23,499|
In this particular scenario, not only does spreading your maternity pay give you a more even income, you get also get an extra £804 of take-home pay!
This is (roughly) a 10% increase in maternity pay.
Why does this happen?
When your pay is more even over multiple tax years you may pay less tax, and make smaller student loan repayments, because a smaller amount of your income is above the various thresholds.
Because this is about the amount of your pay above certain thresholds, the amount you get paid changes the size of the effect.
The graph below shows that spreading maternity pay always (for Made Up Mum) results in more take home pay, but the size of that difference varies considerably with how much you get paid, and whether you have a student loan.
When you have your baby makes a difference to how much tax you pay
Because this effect is caused by spreading pay over multiple tax years, the size of the effect is also affected by when in the year you take your maternity leave – you can’t spread your maternity pay over multiple years if your maternity leave all falls in only one tax year.
The next graph takes Made Up Mum (on 17k salary), but this time alters the maternity leave start date:
This shows that if you go on leave in October then your opportunity to benefit from spreading your maternity pay equally over the year is much greater than if you go on leave in June, where it turns out it is actually slightly detrimental.
I will explore this “lower tax if your baby is born in October” more in a later post, as it will presumably have an impact even if you are not spreading maternity pay.
So, what should I do?
You should do what is right for you and your family. A good place to start is plugging your circumstances into the maternity.money calculator and trying some different options. If your employer allows you to spread your maternity pay, probably you will find you are better off by doing so unless you can qualify for Universal Credit which really helps out in months of low income.
A word of warning:
Any financial upside of spreading your maternity pay will probably be cancelled out by ending your maternity leave early. If you think there is a chance that you will want to go back to work sooner than the period you have spread your pay over, you should probably not spread your pay.
This is a fictional Made Up Mum. There is huge complexity in the tax and benefits system and we cannot take into account all factors that might affect you and the tax you pay. All the examples here were done using the engine that sits behind out Maternity Pay Calculator at the time of writing. Please see the how the calculator works for more information on the assumptions being made.
*Note: some employers who offer “spreading” will not let you spread some or all of the SMP component of the scheme, or place other restrictions like only spreading over 52 or 39 weeks. To keep this (relatively!) simple we have assumed that the entire scheme can be smoothed equally (total gross maternity income is divided by the number of days maternity leave and that amount is paid daily during maternity leave). The spreading function in our calculator works in the same way, and so may not match exactly what is offered by your employer. Contact us if you would like more control on how maternity pay is spread in the calculator.