The prospect of becoming a first time employer can be daunting but it is vital that many areas that require expertise are covered.
Agreed Gross Salary
If you agree a fixed net wage for your nanny (irrespective of their individual tax code or tax position) you as the employer are essentially writing a blank cheque, committing yourself to paying all of your employee’s Income Tax and National Insurance contributions to make up their gross wage, as well as paying your own employer’s National Insurance contributions. This is irrespective of any change in legislation.
Parents often agree a net / take-home wage with their nannies, but the reality is a nanny is nearly always paid a gross salary, with Income Tax and National Insurance contributions deducted and paid to HMRC on a quarterly basis by you, the employer. This is part of the nanny’s gross wage even though it is often regarded by employers as an additional cost. In addition once you have a set gross salary which will include the nanny’s net pay, Income Tax and National Insurance contributions, you will also have to pay your employer’s National Insurance contributions on top of that.
Another advantage to the employer of agreeing a gross salary is to be able to take advantage of the nanny’s full tax allowance which will reduce the amount of Income Tax you as an employer will have to pay. If the nanny has more than one job, then you as an employer may not be able to take full advantage of this tax allowance and find yourself with a larger tax bill than expected. Tax allowances are usually allocated to the first employer and are not available to the second employer. It is a wise idea to try and arrange to divide the tax allowances between your nanny’s different employers so that you as an employer only pay a fair share of Income Tax and National Insurance Contributions.
Our advice is to decide how much in total you can afford to pay your nanny per month in total and then work backwards by subtracting the Income Tax and National Insurance Contributions you will have to pay to arrive at a net salary for your nanny.
Please ask Parental Choice for advice in calculating the total cost to you for employing a nanny and for help in arranging to divide tax allowances between employments. This is all part of our online Nanny Payroll service
PAYE & National Insurance Contributions
- As an employer it is your responsibility to register to pay PAYE and National Insurance Contributions on your nanny’s behalf. Not paying is a criminal offence and may result in a substantial fine. These payment count towards your nanny’s entitlement to unemployment and state pension benefits. They will need an accurate record of their pay when applying for a loan or mortgage.
- If you cut corners by either not registering for PAYE / or registering and only part declaring your nannies salary to save yourself money – this is also a criminal offence and will also damage your nanny’s full entitlement to SMP / SAP / SPP / Holiday pay and other state benefits.
Do NOT agree to any illegal tax-savings with your nanny! Its is a criminal offence and is unfair to your nanny for many reasons.
Where friendly or informal communication between employer and employee has broken down, an employer must give their employee access to their PAYE records within 14 days of receiving a written request.
HRMC is a valuable source for advice and guidance: www.hmrc.gov.uk/paye/intro
Cost of Benefits
Benefits are sometimes provided by the employer in addition to the nanny’s salary.
They are often taxable benefits and must be reported annually as part of nanny’s gross earnings.
Examples of taxable benefits are:-
- Car – The use of a car is not considered a taxable benefit if your nanny only uses it during working hours, for instance to take the children to and from school or to after-school activities. If however the nanny is permitted to take the car home and use it as a means to get to and from work, then it must be reported as a benefit in kind
- Accommodation – If accommodation is provided for the nanny and it has a separate front door and separate metering for gas, water and electricity, it is considered a taxable benefit and must be reported as such.
- Mobile phones are not considered a taxable benefit.
In nearly all other types of employment the employee is always responsible for paying the tax on benefits. However, as many nannies have net pay arrangements, it means that the employer is responsible for paying this tax, which can potentially be very expensive. Tax on benefits is payable in arrears and is not reported until July following the end of the tax year. In many cases it can take up to two years before payments are claimed by HMRC, and during the interim the nanny can have moved from one job to another, leaving the new employer responsible for paying what can in some cases be a very large sum of money. If your nanny is on a gross wage, however, then the tax is calculated from their gross income at their current rate of tax. The issue of benefits is why it is important for a family to agree a gross wage with their nanny.
In addition to tax there may also be a Class 1A NI charge of 12.8% of the value of the benefit to be paid – you, the employer always pays this charge
The information and examples here are just a guide.