Do tips and gratuities count towards the calculation of Statutory Maternity Pay (SMP)?

A question has come my way regarding the calculation of Maternity Pay, which has had my head stuck in the Social Security Contribution legislation book for a little while.

So how do we arrive at the answer?

First, we need to understand SMP and establish what the legislation states is the basis for calculation. Then we need to look at what the tax and NIC rules are for the payment of tips and gratuities

Understanding Statutory Maternity Pay

Under the Social Security Contributions and Benefits Act 1992, SMP is calculated based on average weekly earningsa during a specific reference period. The crucial factor determining what counts as ‘earnings’ for SMP purposes is whether the payment is subject to Class 1 National Insurance Contribution.

Now let’s look at what the Statutory Maternity Pay (General) Regulations 1986 says about average weekly earnings. The Regulations state that the earnings must ‘include all earnings on which Class 1 NICs are due, or would be due if they were high enough’.

So, we have two different legislative rules confirming that he average weekly earnings are based on the pay used to calculate Class 1 NIC’s

Are tips and gratuities liable to NIC deductions?

Yes, they can be, and no, they are not. Clear as mud, so let’s delve deeper to get the answer.

What tips are subject to NIC (so are included in SMP)?W

• Employees’ contract of employment states that the employee will receive a payment of tips
• Credit/debit card and cash tips that are paid through the payroll and allocated by the employer
• Mandatory service charges imposed by the employer, then paid to the employee as tips

What tips are exempt from NIC (so are not included in SMP)?

• Employee keeps all cash tips left for them by customers that are not pooled
• The tips are allocated by an independent third party Troncmaster (through a tronc scheme)

So, the only figures that we need to be looking at are the amounts in payroll that attract Class 1NIC deductions. This, of course, will also affect any salary sacrifice arrangement that is in place. That is for another time!