Small Employers' Relief for Statutory Maternity Pay

I’ve been using Manager for a while now and this forum has been brilliant for solving any queries I had. But I’ve eventually come across a problem which I can’t find the answer to!

The short question is: how do I account for the small employers’ relief on statutory maternity pay (SMP) in Manager?

The same question in more detail and with a bit more context is:

In the UK, if an employer meets certain criteria and one of its employees takes maternity leave, it will be entitled to relief on PAYE contributions equivalent to 103% of the amount of SMP paid.

So, for example (using fictious figures to make the maths easy), a business has two employees. Employee 1 earns £2,000 per month and is liable to pay £400 in PAYE. Employee 2 normally earns the same salary, but takes maternity leave for which she is paid SMP of £1,000 per month. Employee 1 does not have to pay PAYE on her SMP.

On each pay day, the business transfers cash of £1,600 to Employee 1 and £1,000 to Employee 2.

HMRC credits the business’s PAYE account with £1,030 in respect of the small employer’s relief to which it is entitled because of Employee 2’s SMP; and debits it by £400 due to the PAYE owed by Employee 1. As such, every month the business’ PAYE account receives a net credit of £630. Because of this, no cash is paid from the business to HMRC in respect of the PAYE.

After a 10-month period of maternity leave, Employee 2 returns to work full time and becomes liable to pay £400 per month in PAYE. The business’ PAYE account is in credit by £6,300 on the day Employee 2 returns to work (i.e. because of 10 months of a net credit of £630 being applied to that account).

Because of the credit on the PAYE account, no payments are made by the business to HMRC in respect of PAYE until the balance falls below £0 (i.e. until the eighth month after Employee 2 returns to work).

I have been including a PAYE element in the payslip for Employee 1 in the usual way. This increased the amount showing as being owed in the ‘Payroll Liabilities’ liability account by £400 every month when Employee 2 was receiving SMP; and by £800 per month after Employee 2 returned to work. But because the PAYE account is still in credit no cash is being paid from the bank account to HMRC, so that liability account is increasing every month.

I suspect the way to deal with this is through a journal entry, but I cannot work out how this would be done. Any help would be very much appreciated!

Finally, apologies if any of the above terminology is incorrect of needs clarification. I am very much an amateur!

As long as you have PAYE set up correctly as a payslip deduction, the liability account will tell you how much you owe. When the negative balance turns positive, enter a payment posted to the liability account as you remit to the tax authority. No journal entry required.

The problem is this, the HMRC is giving the business a 1,030 credit on their HMRC PAYE account, but this 1,030 never arises as a transaction within the Manager Payroll Liabilities account.

Are you sure that the business shouldn’t be taking up this 1030 as an income, even as a tax exempt income which would have a contra to the Payroll Liabilities leaving the 630 balance (1030 - 400)

Perhaps you need to check the HRMC or an accountant as to how you should be treating this “donation”.

I did not address this valid point specifically in my first response, @sbcosts, because I thought it would be obvious that the allowance from HMRC would need to be recorded. I thought your question was more about how to know how much tax should be remitted.

The 1030 is equivalent to HMRC forgiving tax due or paying it on your behalf. The amount of relief allowed must be debited to Payroll liabilities (or whichever liability account you designated for the PAYE payslip item—I will use that for the rest of this discussion), reducing what you owe. So maybe your question was really how to do that.

If so, don’t use a receipt, because no money is entering any of your bank or cash accounts. Instead, use a journal entry. (My earlier statement about not needing a journal entry had to do with remittance of PAYE deductions. This is different.) In the journal entry, debit Payroll liabilities by the amount of HMRC’s allowance. Credit Wages & salaries (or wherever you assigned the earnings payslip item by which you paid Employee #2). This will decrease the amount you owe HMRC and reduce your recorded wage expense, which was bumped up when you paid Employee #2.

Now, understand that what I’ve written in this post is just bald accounting. In other words, it covers the mechanics of the situation. It does not take into account questions about whether any of the SMP reimbursement is taxable as income to the business. The 3% extra may require separate treatment. For questions about that, you need to consultant a local accountant, as @Brucanna mentioned. Depending on the answer, there might be additional steps in the process I’ve described. My discussion just treats the reimbursement as a transparent replacement of your reduced wage costs with the government’s reimbursement.

Thank you both for your responses, which are very helpful indeed.

Yet, the absence of the 1030 credit transaction from the Manager Payroll Liabilities account was the core question of the topic.

Until one knows if the allowance is a tax rebate or a tax concession the recording isn’t obvious.
Tax rebates would be recordable but tax concessions would remain as tax timing differences.
Then with the tax rebate, is it recordable as income pre or post the applicable period’s taxable income.