Accounting for statutory maternity pay accruals and reclaiming SMP in the UK

Calculating Your Net Cash Outlay for Statutory Maternity Pay

When a key member of your team announces they are expecting a child, the first priority is celebration. The second, for any founder, is understanding the financial implications. For UK startups, navigating Statutory Maternity Pay (SMP) can feel complex, raising immediate questions about cash flow, payroll compliance, and accurate financial reporting. This sits within the broader scope of benefits accounting and accruals.

This guide breaks down UK maternity pay rules into manageable steps, moving from the cash in your bank to the liabilities on your balance sheet. It provides the practical knowledge needed to handle maternity leave financially, ensuring you stay compliant, manage your cash effectively, and support your team without unexpected financial strain.

The Bottom Line: What is the Actual, After-Reclaim Cost?

Before diving into accounting entries, the most pressing question is: what is the actual, after-reclaim cost of SMP to my business? The gross figure you pay to your employee is not the final cost to your company. Understanding this difference is fundamental to effective maternity leave financial planning.

Statutory Maternity Pay is a legal requirement for eligible employees. To qualify, an employee must have been employed continuously for at least 26 weeks by the 15th week before the expected week of childbirth. The payout structure is defined by law:

• For the first 6 weeks: The employee receives 90% of their Average Weekly Earnings (AWE).
• For the next 33 weeks: The employee receives the lower of a statutory flat rate (£184.03 for the 2024/25 tax year) or 90% of their AWE.

Average Weekly Earnings (AWE) is the employee's average gross pay, calculated over the 8-week period ending on the 15th week before the baby's due date. This figure is the foundation for the entire SMP calculation.

Understanding HMRC Reclaims: Small Employers' Relief

Crucially, your business can recover a significant portion of this cost from HMRC. The standard SMP reclaim rate is 92%. However, many early-stage businesses qualify for Small Employers' Relief. This relief applies if your total Class 1 National Insurance contributions in the last full tax year were £45,000 or less. If you qualify, you can reclaim 103% of the SMP you pay out.

This creates a clear decision rule for your business: if your previous year's Class 1 NI bill was £45,000 or less, you will receive a small net cash benefit from paying SMP. If it was more, you will incur a small net cost.

Worked Example: A SaaS Startup

Consider a developer at a UK SaaS startup earning £65,000 annually. Her AWE is approximately £1,250.

• Gross SMP Payout Calculation:
  • Weeks 1-6: 90% of £1,250 = £1,125 per week (£6,750 total).
  • Weeks 7-39: £184.03 per week (as it's lower than 90% of AWE) x 33 weeks (£6,072.99 total).
  • Total Gross Payout = £12,822.99
• Net Cost Calculation:
  • Scenario A (Small Employer): The startup's NI bill last year was £40,000, so they qualify for Small Employers' Relief and can reclaim 103%.
    • Reclaim: £12,822.99 x 103% = £13,207.68
    • Net Cost: £12,822.99 - £13,207.68 = -£384.69. (A net cash benefit)
  • Scenario B (Standard Rate): The startup's NI bill was £50,000. They do not qualify and must reclaim at the standard 92% rate.
    • Reclaim: £12,822.99 x 92% = £11,797.15
    • Net Cost: £12,822.99 - £11,797.15 = £1,025.84.

This initial calculation reveals the true financial impact, which is often much lower than founders initially fear. It is the first step in meeting your employer responsibilities for maternity pay correctly.

Reclaiming SMP from HMRC: The Mechanics of Payroll and EPS

Knowing your net cost is one thing; managing the cash flow is another. The process of reclaiming SMP from HMRC can be confusing for founders. This is not a direct cash refund deposited into your bank account. Instead, you deduct the amount you are owed from your company's monthly PAYE payment to HMRC. This payment typically includes income tax, employer’s NI, and employee’s NI contributions.

The key mechanism for this is the Employer Payment Summary (EPS). This is a report you send to HMRC alongside your regular payroll filings that details any statutory payments like SMP that you have paid to employees. It effectively tells HMRC, “This month we paid out £X in SMP, so we are reducing our total PAYE bill by £Y (the reclaimable portion).”

It is vital that an EPS must be submitted by the 19th of the month following the tax month being reported. Missing this deadline can lead to delays in your reclaim, incorrect payment demands from HMRC, and potential penalties.

Automating Reclaims with Payroll Software

For most startups using modern accounting software like Xero Payroll, this process is largely automated. These systems are designed to handle the complexities of payroll compliance for maternity leave. When you process your monthly payroll, you will input the employee’s maternity leave dates. The software will then:

1. Automatically calculate the SMP due for that pay period.
2. Calculate the reclaimable amount based on your company's status (92% or 103%).
3. Prepare the EPS filing alongside your Full Payment Submission (FPS).

When you submit your monthly filings to HMRC, the system sends both the FPS and EPS. Your subsequent payment to HMRC for PAYE will be automatically reduced by the reclaimed SMP amount. This integration is a core part of maintaining accurate payroll and protecting your cash flow.

How to Account for Statutory Maternity Pay Accruals in the UK

As your startup matures, particularly when approaching a Series A fundraise or your first audit, simply managing cash flow is not enough. You need to ensure your financial statements present a “true and fair view” of your company’s financial position. For UK companies, this means complying with UK GAAP, specifically FRS 102, which requires liabilities like SMP to be properly recorded.

This is where SMP accrual accounting comes in. An accrual recognises an expense when it is incurred, not when the cash is paid. According to the basic accrual principle, you have an obligation to pay the full 39 weeks of SMP as soon as your employee begins their leave. Accrual accounting means recognising this entire liability on your balance sheet from day one.

This method smooths the impact on your Profit & Loss (P&L) statement, showing a consistent maternity leave cost over the period rather than large spikes in the first few months. It is important to remember that the P&L impact (smoothed) is different from the cash flow impact (lumpy). Your cash flow will still reflect the actual payments out to the employee and the reduced PAYE payments to HMRC.

Example Journal Entries for SMP Accrual

Let's use the standard rate scenario from our SaaS example, where the net cost is £1,025.84. These entries ensure you keep your books clean and compliant. See related journal entry examples in our UK pension contribution accounting guide.

1. When maternity leave starts (to recognise the full liability): This initial entry sets up the entire expected transaction on your balance sheet. It recognises the expense, the asset you expect back from HMRC, and the total liability you owe to the employee.
   • Debit: Maternity Pay Expense (P&L): £1,025.84
   • Debit: SMP Receivable from HMRC (Balance Sheet Asset): £11,797.15
   • Credit: SMP Liability (Balance Sheet Liability): £12,822.99
2. Each month as you pay the employee via payroll: This journal reflects the cash leaving your bank and reduces the liability you recorded.
   • Debit: SMP Liability (Balance Sheet): [Monthly SMP paid]
   • Credit: Bank (Balance Sheet): [Monthly SMP paid]
3. Each month as you reduce your PAYE payment: This entry reflects the "payment" from HMRC. It reduces the PAYE you owe and simultaneously reduces the receivable asset you set up in the first step.
   • Debit: PAYE Liability (Balance Sheet): [Monthly SMP reclaimed]
   • Credit: SMP Receivable from HMRC (Balance Sheet): [Monthly SMP reclaimed]

This accounting approach ensures your financial statements are accurate and compliant, which is critical for passing investor due diligence and preparing for an audit.

Maternity Leave Financial Planning: Forecasting the Cash Flow Impact

Accurate accounting is for reporting on the past; robust forecasting is for protecting the future. A scenario we repeatedly see is founders being caught off guard by the cash flow timing of maternity leave, even when they know the net cost is low. The initial months involve significant cash outflows before the reclaim mechanism fully kicks in via reduced PAYE payments. This can put a temporary but meaningful dent in your runway if not planned for.

Effective financial planning requires integrating parental leave events directly into your financial model. This moves beyond a simple P&L expense line and models the month-by-month cash impact.

Building a Parental Leave Forecast in Your Model

Within your master financial spreadsheet, create a dedicated section or tab for parental leave. It does not need to be complex, but it should be dynamic. Here is a simple, four-step process:

1. Inputs: Create rows for each potential leave event. Key inputs are the employee's name, their expected leave start date, and their calculated Average Weekly Earnings (AWE).
2. Payout and Reclaim Schedule: Create columns for each month of your forecast. For a given employee, model the gross SMP payout for each month across the 39-week period. In a separate row, calculate the corresponding monthly reclaim amount using your 92% or 103% rate.
3. Net Cash Flow Impact: The most important row. For each month, the formula is simple: (Gross SMP Paid Out) - (SMP Reclaimed). This calculation will show a net cash outflow in the early months, which then tapers off or turns positive as the reclaims offset other tax liabilities.
4. Link to Master Cash Flow: This final "Net Cash Flow Impact" line item should feed directly into your main cash flow forecast. This ensures the temporary dip in cash is fully visible in your runway calculations, preventing any surprises.

This methodical approach transforms a potential financial risk into a predictable and manageable operational task. For more guidance on related topics, see the broader Benefits Accounting & Accruals hub.

Key Actions for Managing UK Maternity Pay

Navigating UK maternity pay rules is a manageable process when broken down into clear financial and administrative tasks. For founders and finance leads at growing British companies, focusing on these five actions will ensure compliance and protect your cash flow.

• Confirm Eligibility and Calculate AWE: The moment you are notified of a pregnancy, verify that the employee meets the "employed for at least 26 weeks by the 15th week before the expected week of childbirth" criteria. Calculate their Average Weekly Earnings immediately to establish the basis for all future calculations.
• Determine Your True Net Cost: Look up your company's total Class 1 NI contributions from the previous tax year to see if you fall below the £45,000 threshold for Small Employers' Relief. This determines whether you reclaim 92% or 103% of SMP costs, fundamentally changing the net financial impact.
• Automate Reclaims with Payroll Software: Ensure your payroll system, such as Xero, is correctly set up to process SMP. This includes generating and submitting the Employer Payment Summary (EPS) to HMRC by the 19th of the following month to activate your reclaim as a reduction in your PAYE bill.
• Adopt Accrual Accounting as You Scale: While very early-stage startups might focus solely on cash forecasting, you should implement formal SMP accrual accounting as you approach an audit or new funding round. This aligns your books with FRS 102 and presents a more accurate financial picture to stakeholders.
• Model the Cash Flow Impact: The most critical step for runway management is to build a parental leave schedule into your financial model. Map out the monthly gross payouts and reclaims to understand the precise timing of cash movements, avoiding any surprises down the line.

Frequently Asked Questions

Q: What happens if an employee decides not to return to work after their maternity leave?

A: Your obligation to pay SMP is unaffected. Statutory Maternity Pay is a legal entitlement based on the employee's previous service and NI contributions, not on their intention to return. You must continue to pay the full 39-week entitlement, and you can still reclaim the cost from HMRC as normal.

Q: Can we reclaim costs for enhanced (contractual) maternity pay?

A: No. The HMRC reclaim scheme only applies to the statutory portion (SMP). Any enhanced or contractual maternity pay offered above the statutory amount is treated as a standard business expense. It is not reclaimable and should be accounted for separately as a salary cost.

Q: How does Statutory Maternity Pay affect an employee's pension contributions?

A: Employer pension contributions must continue based on the employee's normal salary (the salary they would have received if not on leave). However, the employee's own contributions are based on the actual SMP payments they receive. This is a key part of your ongoing employer responsibilities for maternity pay.

Q: What is the very first step I should take when an employee announces their pregnancy?

A: After congratulating them, your first practical step is to ask for their expected due date and planned leave start date. This allows you to verify their eligibility for SMP and calculate their Average Weekly Earnings (AWE) in your payroll system, which is the foundation for all financial forecasting.