If an employee qualifies for Statutory Maternity Pay (SMP) but their employment ends before or during maternity leave, you can either pay their remaining SMP as a lump sum or continue paying it in the normal installments.
1) Pay the remaining SMP as a lump sum:
You can pay the employee’s remaining SMP entitlement as a single payment when their employment ends. This allows you to issue their P45 immediately.
Keep in mind that a larger one-off payment may:
- Result in higher National Insurance contributions than payments spread across the normal maternity period.
- Lead to more tax being deducted initially, depending on the employee’s tax code. This would usually correct itself over time if they are on a cumulative tax code.
- Trigger higher student loan or postgraduate loan deductions, where applicable.
2) Continue paying SMP in normal installments
Alternatively, you can continue paying SMP according to the normal maternity pay schedule after the employee’s employment has ended.
This is the approach most employers choose, as it generally results in the correct tax and National Insurance treatment throughout the maternity period.
If you use this approach, we generally recommend leaving the employee on payroll and not marking them as a leaver until all SMP payments have been made. Their P45 can then be issued after their final SMP payment.
Issuing the P45 before SMP has finished means each subsequent payment needs to be processed as a Payment After Leaving (PAL), which can result in less favorable tax treatment for the employee.
Check the employee’s pay slip each month to make sure they are receiving only their SMP and any applicable contractual maternity pay.
You can also issue the P45 immediately and continue paying SMP each month as a Payment After Leaving. However, this is less common because of the potential tax implications.
The approach you choose will generally depend on what works best for you and the employee and what has been agreed as part of the settlement.