Paternity Leave & Pay: Tax Savings for SME Owners
Author: Russell SmithNovember 3, 2017
Baby on the way? Discover your rights to a salary as an employer with advice from our chartered accountants in Leeds.
Babies are a precious, precious gift. They light up your life and change how you see the world. They can also be a gift for your taxes, too.
Maternity pay is a subject regularly covered by financial websites, but details of paternity pay are less well-known. Today, the team from Russell Smith Chartered Accountants plan on offering up some advice to soon-to-be parents about their rights to paternity pay and how they can claim it on their tax returns.
Who Does This Advice Apply To?
“Obviously, being paternity pay, this advice applies only to men” is an incorrect statement.
Same-sex couples having a baby are also entitled to paternity pay. The member of the partnership who is not having the baby is given the opportunity to have paternity leave and pay.
Please note that, while women are now able to take paternity leave, unfortunately, the law has yet to catch up to same-sex marriages for men in terms of maternity leave, as the full 9-12 month terms of paid leave are only offered to the women giving birth.
This advice also only applies to business owners/directors of a limited company. We’ll be discussing how, as a company owner, you can achieve tax savings and pay yourself a paternity wage.
The Statutory Rights of Paternity Pay
As detailed on Gov.uk, employees of a company are entitled to maternity pay if:
- They are adopting a child
- Having a baby
- Having a baby via surrogacy
You are able to take a maximum of two weeks paid paternity leave under the UK law and the leave cannot be taken 56 days after the date of birth.
You are entitled to the lower amount of either:
- £140.98 a week
- 90% of your average weekly earnings
In terms of cash, the figures are exactly the same as maternity.
Due to the excessively low costs of claims available, most freelancers and small business owners are tempted to not take the time off for maternity, but when it comes to paternity, as the time available is short, it is more common practice to take the full amount offered.
Chartered Accountants Discuss Claiming Paternity Pay on Tax Returns
So, in a traditional employment situation, if you are entitled to two weeks paternity pay, your employer must let you have those two weeks off work and pay you for it. However, as a business owner, how can you pay yourself that money?
You have to be managing the business to earn a living. If you aren’t working and you don’t make money, how can you pay yourself? The answer is actually very simple (and slightly given away in the heading…).
Paternity pay is tax-deductible and the government will allow you to claim it back on your tax returns, so long as you being are paid a salary out of your business in the traditional PAYE/NI format. This is why only business owners of an established limited company are eligible.
The process works like this:
- Register your intention to take paternity leave with the government
- When the paternity pay comes round, pay yourself the entitled amount (paternity costs cannot be claimed as dividends)
- When submitting your returns, claim the costs back to your PAYE/NI contributions
And that is effectively it. You’ll be able to increase your non-taxable income, resulting in your paternity leave effectively being covered by the state.
If you need help sorting your paternity wages and tax payments, we’re here to help. Our chartered accountants will provide a bespoke service, designed to fit exactly with your company’s situation and your maternity needs.
Russell Smith is an award-winning accountant and founder of RS Accountancy. With over a decade of experience running his company, he has worked with countless small businesses just like yours, helping them grow profits and manage their finances. Russell is also a prolific financial writer, having contributed to such publications as The Guardian, The Telegraph and The Daily Mail.