Tax & Paying Nannies
It's becoming increasingly common for 2 or more families to share a nanny between them. This figure has been rising steadily in the last few years.
We expect this trend to continue as nanny sharing provides an affordable solution to the childcare dilemma, especially in the current economic climate.
Responsibilities when employing a nanny
When you employ a nanny in the UK you not only have to find the best carer for your children, you also become an employer, and as such you take on a host of responsibilities.
For instance, you have to draw up an employment contract with your nanny within 2 months of her starting date and you must also give her a payslip every time she gets paid.
It is a legal responsibility that you have Employer's Liability Insurance, and you must also make sure that you pay your nanny at least the NMW or above.
In addition you need to have a good understanding of the basics of employment law, because it's surprisingly easy to make mistakes when you're juggling issues such as holiday entitlement, SSP, benefits in kind, SMP and redundancy pay to name a few.
Agree a gross salary with your nanny
Nannytax recommends that all pay arrangements are made on a gross basis. It's especially important to agree a gross wage if you are in a nannyshare.
A gross pay agreement will automatically protect your total cost, and so it doesn't matter if the current share dissolves. If you agree a gross wage the communication between you and the other family can also be kept to a minimum.
Parents often agree a net (i.e. take-home) wage with their nannies, but in reality a nanny is always paid a gross salary, with tax and National Insurance Contributions deducted and paid to HMRC on a quarterly basis by the employer. Although many employers tend to look on this as an additional cost, it is actually part of the nanny's gross wage.
Please also be aware that a gross wage is not the total cost to you as an employer. In addition to this you have to pay an Employer's National Insurance Contribution, which is not part of the employee's gross wage.
When you agree to pay a gross wage with your nanny your total costs are protected, and you will not normally be affected by any changes in legislation, nor will you run the risk of getting lumbered with any unpaid tax from your nanny's previous employment. But by agreeing a net pay you are essentially writing a blank cheque - committing to pay all nanny's tax and National Insurance contributions, irrespective of any changes in the legislation and without taking into account her individual tax code or tax position.
- There are several reasons why a nanny's tax code can vary from a standard tax code. For instance, if she has 2 part-time jobs and her other employer is already using up her personal tax-free allowance in their wage calculations, then you, the second employer, must pay tax from the first penny the nanny earns, since the personal tax-free allowance can only be claimed once. Another reason for an unusual tax code would be if HMRC were collecting unpaid or underpaid tax from previous employment
- An increasing number of state benefits and tax reliefs are paid through the payroll mechanism as an offset to employee tax and NI liability. Any taxable benefit provided by the employer, such as the personal use of a car, will increase costs if they are based on a fixed net wage
- If your nanny has a student loan you will be responsible for paying this if you agree a net salary with her
- The difference between a net pay and the actual cost of employing a nanny can be staggering (up to 50% more) and may come as an unpleasant surprise, especially to an inexperienced first-time employer.
Tax code splits
If you have agreed a net wage with your nanny Nannytax recommends that her tax code is split. This means that the nanny's tax code is split proportionately between her jobs. It is a very straight-forward exercise, mainly because our nannyshare team deals directly with a tax code specialist at our dedicated tax office. Please note that before a tax code split can be applied we need approval from the nanny.
How does it work? (using Nannytax)
- Both employers submit the details of the share arrangement to Nannytax
- We then send a letter to the nanny outlining the arrangement and the proposed tax code split, which nanny needs to sign and return to us
- Once we have received nanny's approval we fax the request to our specialist at the tax office
- The new tax codes are normally notified to us within 48 hours
Please note that tax code splits cannot be applied retrospectively.
More about Nannytax
Nannytax is the UK's leading payroll support service for nanny employers and have more than 15 years' experience in domestic payroll.
Nannyshare.co.uk recommends you consider using Nannytax. They act as your agent and do everything for you, from setting up a PAYE scheme and calculating the correct tax and National Insurance payments, to making sure your nanny's payslips are accurate. All you have to do is actually pay the nanny HMRC. It's as simple as that.
