Maternity pay in Britain, a filing question in America

It is the payment your employer makes during maternity leave, set by law rather than by your contract. It runs for up to 39 weeks. Your employer pays it through payroll, and tax and National Insurance come off it as usual.

GOV.UK sets the pattern. For the first six weeks you receive 90% of your average weekly earnings before tax. For the next 33 weeks you receive £194.32 a week, or 90% of average weekly earnings if that figure is lower.

Payment follows your normal payroll cycle, so it arrives weekly or monthly exactly as your salary did. Tax and National Insurance are deducted in the usual way.

That last point matters more than the amounts. Deducted tax is creditable tax, and credit is what protects you on the US side.

It is the payment for people who cannot get SMP. GOV.UK explains that you may qualify if you are employed but ineligible for SMP, self-employed, recently stopped working, or doing unpaid work for your spouse's business. It also runs for up to 39 weeks.

Britain does not charge income tax on it. That sounds like the better outcome, and in purely British terms it is.

For a US citizen the picture inverts. No UK tax means no foreign tax credit, so any US charge on the same money stands on its own.

This is the question that decides which relief applies. The instructions to Form 2555 define foreign earned income as wages, salaries, professional fees and other compensation received for personal services you performed in a foreign country. The payment has to relate to services, not merely to employment.

Statutory maternity pay comes from your employer under your contract while you live and work abroad, which is the fact pattern that points towards earned income. The IRS, however, has published nothing naming SMP specifically.

So we take a position on the facts, document it, and check that the alternative route still protects the client. That alternative is the foreign tax credit, which does not care whether the income was earned.

Our comparison of the exclusion and the credit sets out when each one does more work.

Here is the trap that costs real money. Publication 54 states plainly that if you elect the foreign earned income exclusion, or the housing exclusion, you cannot take the additional child tax credit in the same year.

New parents feel that immediately. The refundable child credit is often the only cash a US citizen abroad expects from the IRS, and the exclusion election removes it.

The alternative is the foreign tax credit. Where UK tax on your salary is high enough, the credit can reduce your US tax to nothing while leaving the child credit available.

We model both routes in the year of a birth rather than defaulting to last year's election. Our note on the child tax credit from abroad covers the conditions in full.

Switching between the two reliefs has consequences beyond one return. Revoking an exclusion election locks you out of it for five years without the IRS agreeing otherwise.

So the decision in a birth year is not simply this year's arithmetic. It is a decision about the next several years of filing.

That is why we look at the whole period: earnings before leave, reduced pay during it, and what happens when you return to work.

Your income drops, and the drop changes the US calculation more than people expect. Lower UK earnings mean lower UK tax, which means fewer foreign tax credits for the year. A year with less income can therefore be a year with more US exposure.

Investment income compounds that. Dividends and gains sit in a different category on Form 1116, so salary credits never reach them anyway.

Plan the year as a whole. The month-by-month view misses the point entirely.

This one catches people before the baby arrives. HMRC warns that salary sacrifice affects statutory payments, because they are based on average weekly earnings. If an arrangement pushes those earnings below the lower earnings limit, the employer does not have to make statutory payments at all.

The same guidance notes that sacrifice can reduce entitlement to Maternity Allowance too. A pension arrangement that saves National Insurance today can therefore cut the payment you rely on next year.

Check the timing before agreeing to anything. Average weekly earnings are measured over a set period, and that period sits earlier than most people realise.

Our article on National Insurance for Americans explains how those earnings are measured in the first place.

Statutory shared parental pay follows similar mechanics. It runs through payroll with tax deducted, so the US analysis largely repeats.

Where both parents are US citizens, look at both returns together. Splitting leave between two people also splits the income, and that changes which parent has credits and which has exposure.

Where only one parent is a US citizen, the filing status question arrives alongside it. Married filing separately is the usual status with a non-US spouse, and the filing threshold for that status is $5.

A child born to a US citizen abroad may be a US citizen from birth. That brings its own paperwork, starting with a consular report of birth and a Social Security number.

The number matters for tax as well as for identity. Certain child-related credits require one issued before the return is due.

Our article on a US citizen child born abroad sets out the sequence. Start it early, because appointments abroad are not quick.

Your employer pays it, then recovers most of it from HMRC. That recovery happens behind the scenes, so the money reaches you as payroll rather than as a state benefit. The distinction looks administrative from a desk in Leeds, and it decides the US analysis.

Payroll payments carry deducted tax. Deducted tax can be credited. State payments made free of tax carry nothing to credit.

So ask one question first: did this arrive on a payslip? Everything else follows from the answer.

Then statutory maternity pay is not available to you, and Maternity Allowance takes its place. That puts you on the tax free side of the British system, where no UK tax arises on the payment itself. The US side then depends entirely on relief from other income.

Self-employment brings a second issue in the same year. Profits fall during leave, so the UK tax that funds your credits falls with them.

We look at the two years together for freelance clients. A quiet year followed by a busy one is a different planning problem from two steady ones.

Collect three documents for the year: your payslips, your P60 and any award letter from the state. Between them they show what arrived, who paid it and what tax came off. That is the whole evidential basis for the position taken on the return.

Store them by calendar year rather than by tax year. The US return works to December, and sorting once at the start saves sorting twice later.

Our clients who file this way answer follow-up questions in minutes. The rest rebuild a year from a bank feed, which is slow and rarely conclusive.

Work through the year in this order, ideally before it ends.

Take an illustrative year. An American in Leeds earns £48,000, then takes nine months of leave. She receives statutory maternity pay through payroll with tax deducted, and her total UK income for the year falls to about £30,000.

If she elects the exclusion, her US tax is nil and the additional child tax credit disappears. If she claims the credit instead, UK tax on her salary may cover the US charge and leave the child credit available.

The figures are illustrative, though the choice is real and it is worth several thousand dollars in some years. Running it both ways takes an hour.

First, assuming a tax free British payment is invisible to the IRS. Second, keeping last year's exclusion election out of habit, then losing the refundable child credit.

Third, mixing the tax years. Britain runs to 5 April and America to 31 December, so leave that spans a spring will sit across two US returns.

Fourth, agreeing to a salary sacrifice arrangement while planning a pregnancy. Our clients are rarely told about the earnings test, because the person offering the scheme is not thinking about statutory pay.

We treat the birth year as a planning year rather than a filing year. That means modelling both reliefs, checking the credit conditions, and looking at the following year before locking in an election that lasts five.

We prepare the US federal return with the positions written down, including how each payment was characterised and why. Where the answer genuinely turns on unsettled ground, we say so in plain terms.

Send us the payslips and the award letter and we will tell you which route costs less.