Taking time off to have a baby has financial implications, but there are ways to make it easier. We look at the options available for both parents and how to make it work
Changes in working habits and greater equality between parents mean there are a variety of options available for both parents when it comes to who will look after your newborn child.
Whether you are employed, self-employed or run your own business, all of these choices will have a short- and long-term financial impact, which you need to consider carefully.
The system is also fraught with complexities making it difficult to navigate and claim government support, so here is our guide to getting it right.
All female employees are entitled to statutory maternity leave of up to a year and must take a minimum of two weeks. Statutory maternity pay is paid for up to 39 weeks in the same way as wages. All women are paid 90% of their average weekly earnings before tax for the first six weeks of maternity leave and then £148.68 or 90% of their average weekly earnings (whichever is lower) for the next 33 weeks.
The same applies if you are adopting, and the adoption leave and pay can be taken by one person in a couple. Couples who use a surrogate may be eligible for adoption leave, as well as paternity pay and leave.
Some employees may get more than this if their employer offers its own maternity scheme, known as occupational or contractual pay. This may be full salary, or a proportion of it, for a fixed number of weeks.
It is a different story for mums who work for themselves. Self-employed women who pay class 2 national insurance contributions (NICs), and have worked for the required period, are able to claim a different benefit, maternity allowance, for 39 weeks. It pays £148.68 for the whole period so, unlike employed women, they will not receive a higher amount during the first six weeks.
If your partner is having a baby, then you might be eligible for one to two weeks’ paternity leave. Similar to maternity pay, the statutory weekly rate of paternity pay is £148.68 or 90% of average weekly earnings (whichever is lower). Again, some employers will offer a better deal.
Exactly the same benefits are available to couples in same-sex relationships. One member of the couple can claim maternity benefits, while the other can claim paternity benefits.
“Shared parental leave is financially demanding”
Graphic designer Jamie Brown, from Clitheroe, took three blocks of shared parental leave across a year to support his self-employed partner, Jessica Robinson, when their first child was born.
Dividing up the leave meant he could go back to work every few months to build up his earnings.
“It is a really nice thing to do, but financially it is quite hard unless one of you is earning a decent amount. At the time Jess was not earning a lot, so we did have to subsidise it with our savings and cut back on our food shops and holidays. I used around £3,000 of savings.”
Jessica took two weeks’ maternity leave, claiming maternity allowance before her partner took his shared parental leave and pay.
Through his employer, Jamie received almost full pay for the first four weeks before moving on to a reduced amount.
“I knew that I could cover the mortgage, so I decided to do three months and see how it went. I returned to work for a month and topped up my wage and then went off again for a couple of months. Then I went back to work for two months and had another two off after that. By then, I was only earning around £140 a week in shared parental pay.”
But now Jessica, who runs print company Squiffy Print, is expecting their second child, Jamie has decided not to take shared parental leave again.
“I will take two weeks’ paternity leave, which is paid, but we are engaged now and don’t want to dip into our wedding savings.
“Jess will take maternity allowance for two weeks and then use keeping-in-touch days to keep the business going.”
Splitting the care
Shared parental leave was introduced in April 2015 to make it easier for both parents to spend time with their baby and to reduce pressure on the mum’s – or primary carer’s – career.
The scheme gives couples the opportunity to share up to 50 weeks’ leave and 37 weeks’ pay between them. It is paid at the same rate as statutory maternity pay but during the first six weeks it is not paid at 90% of earnings, only at the £148.68 weekly rate. Each parent can book up to three blocks of shared parental leave.
However, despite its benefits, shared parental leave remains chronically underused with just 1% of eligible parents opting to take it, according to a 2017 report by law firm EMW LLP.
Deborah Vickers, personal finance expert at Moneyguru.com, says: “It is important to know when your maternity, paternity or shared parental leave actually starts.
“Some people may fall into the pitfall of thinking it is when the baby is born, however this is not usually the case [it can be much earlier – see page 36]. Make sure you check in with your employer and find out the facts, so you are not caught short.”
Delays and complexities
The Government has come under fire in recent years for the huge backlog in processing maternity allowance claims.
The earliest a woman can apply for maternity allowance is 14 weeks before her expected ‘week of confinement’, but she is entitled to claim the allowance up to 11 weeks before her due date. The Department for Work and Pensions (DWP) website says women will get a decision on their claim within 4.8 weeks.
But according to charity Maternity Action, women have been waiting up to 12 weeks for a decision and some have already given birth before their claim has been processed, meaning they have started maternity leave with no financial support.
A DWP spokesperson says: “We understand how important this financial support is for new parents and are sorry for the delays some are currently experiencing. We have already put more staff in place to speed up the process and are fast tracking emergency cases. We urge people to apply as soon as they are eligible. All payments will be backdated to the date when someone becomes eligible.”
Maternity Action has also expressed concern about the inflexibility of enhanced shared parental leave offered by employers. Some of these policies deduct the number of weeks’ leave taken by the mother. This significantly reduces the amount of paid leave available to partners and forces mothers to take the minimum leave possible, both before and after the birth, if her partner has better paid leave.
Tax and national insurance
It is important to remember that when you are taking maternity, paternity or shared parental leave that you are still viewed as employed by HMRC, so continue paying tax and national insurance on any leave pay.
The tax and national insurance will be proportionate to the amount you are paid, so this will be a lower amount than your usual pay package.
“I have no choice but maternity pay”
Business woman Charlotte Bordeway decided to take six weeks’ statutory maternity pay before returning to work because shared parental leave was not a viable option.
With her second child due in April 2020, she has been weighing up options with her husband, Tom, an assistant manager for a retail business.
The West Midlands couple decided they would lose too much money if they decided to take shared parental leave. This is because statutory maternity pay allocates the mother 90% of average earnings for the first six weeks but only £148.68 a week for a partner claiming shared parental pay.
“As a business owner, I cannot afford to take any more time off work, so my new baby will come back to work with me. But my husband cannot even take shared parental leave in the first six weeks because I have to take two compulsory weeks and then for the remaining four he would earn so little money, it doesn’t make financial sense. Instead, he will have to take holiday.
“Shared parental leave sounds great, but even the biggest companies aren’t getting it right.”
And the business, Spencer-Brookes Designs, which makes personalised gifts, has already suffered due to late payment of a staff member’s maternity pay.
“My sister-in-law works for the company and has been on maternity leave. She was back at work before the maternity pay was paid back to the company. It took HMRC five months to reimburse the maternity pay and then they paid it into the wrong account.”
Pensions are treated differently, and your employer will continue to contribute the same level as they did prior to your leave. But your own personal contribution to your pension will decrease in relation to your earnings, so you need to be aware that less money is going into your pension overall during this time.
If you decide not to return to work or to go back part-time then this will impact on your NICs, which in turn affects your state pension. You need 30 ‘qualifying years’ to get the full state pension. If you have fewer than 30 years, you might be able to top it up by paying voluntary contributions at a later date.
So once the baby arrives, make sure you register for child benefit – even if you are not eligible for it – as this triggers the payment of national insurance credits.
Child benefit is currently paid at a rate of £20.70 a week for the eldest or first child and £13.70 for additional children.
Following a change of legislation in 2013, any household where one parent earns £50,000 or more has to pay some or all of it back through a tax charge.
Families who are not eligible for child benefit can opt to not receive it, but in doing this national insurance credits will not be triggered, meaning the mother (or primary carer) could risk reducing their entitlement to state pension further down the line.
Make sure the right person is registered, which is usually the non-earner, but remember you can also transfer NICs from one partner to another to boost your state pension.
Can I work while I am on parental leave?
Employees can work up to 10 days during maternity, adoption or additional paternity leave as part of keeping in touch (KIT) days. These are not a legal requirement and have to be agreed between both employee and employer. The KIT days are paid at an agreed rate and do not affect an employee’s right to claim maternity, adoption or paternity leave and pay.
Many parents use up these KIT days after statutory pay runs out followed by the paid annual leave they have accrued while off work.
If you are self-employed and receiving maternity allowance you can top up your earnings by working your 10 KIT days at the same time as receiving your £148 a week.
It is also important to make sure you keep in contact with your employer throughout your maternity leave, so you are not left out of the loop of any significant changes, warns Abigail Brown, independent financial adviser at AFH Wealth Management.
“A lot of people go on maternity or paternity leave and put work to the back of their heads. But if there is a restructure, they might not be not taken into account or consulted. This can have a big impact on their job, which they don’t realise until they go back. It is always best to stay in touch,” she says.
“Those precious weeks with my son were worth every penny”
“In the summer months of 2018 I became part of a statistic, the ‘2% club’, which was the frighteningly low number of fathers to have taken advantage of new shared parental leave regulations. I imagine this percentage has not moved upwards much since then.
Two reasons are mainly cited for a lack of take-up by men: the financial impact on the household income and the potential negative career impact – don’t worry, female readers, the irony is not lost on me.
In terms of finances, there is no magic money tree, so you have to prepare. In our case, I had decided I wanted to share some of the leave with my partner prior to the baby’s arrival. We started putting a certain amount away each month to cover our outgoings, most notably the mortgage. In essence, we built a ‘rainy day baby’ fund, covering three months’ salary in cash, as that was the amount of time I took off.
It meant cutting back a little in the short term, but those precious weeks with my son, Quinn, were worth every penny and as an added bonus in-between frequenting various soft play centres the World Cup was on!
Kyle Caldwell, deputy editor, Money Observer