Deciding to take on a nanny can seem like a daunting task. Choosing the right person to look after your precious children is taxing enough without realising that you now need to become a domestic employer with responsibilities towards your nanny, an ‘employee’.
This is a step by step guide to ensure that you feel confident in becoming an employer and best understand how to create valuable relationships between you and your household staff.
Beware the self-employed nanny
We often hear from lots of parents who request that their nanny be ‘self-employed’ in order to avoid becoming employers and dealing with the tax and NI. Instead the nanny will submit tax returns yearly to HMRC and the agreement between nanny and parent is more of a ‘service agreement’.
Whilst this seems like the most convenient and hassle free option in theory, in practice the reality is much more complex.
The HMRC definition for considering a worker as an ‘employee’ is that they:
- have to do the work themselves
- can be told at any time what to do, where to carry out the work or when and how to do it
- work a set amount of hours
- can be moved from task to task
- are paid by the hour, week or month
- can be paid overtime or receive bonus payments
From even a cursory glance it’s easy to see that the majority of nanny – parent relationships fall under the ‘employed’ category. Therefore, it is the legal responsibility of the parents to become employers.
Are their exceptions to the rule? Of course, there always are, if your nanny works for lots of other families or works very temporary placements she might be able to be self-employed. When engaging a nanny who says she is self-employed she must show proof from HMRC for each parent-nanny situation that they have given permission for her to be considered as such. Even if the nanny tells the parents she is dealing with her own tax and it is later revealed this isn’t the case then it is still the parents who will be held responsible and face harsh fines by HMRC.
To PAYE or not to PAYE?
Once you’ve established that you need to become a domestic employer it’s important that you set up a PAYE (Pay As You Earn) scheme with HMRC. You can either do this yourself where you’ll need to download and use payroll software to produce payslips, and you’ll need to make monthly submissions to HMRC under RTI (real-time information) legislation, or you can outsource your duties to a payroll company or accountant.
You might be tempted to pay your nanny cash in hand but there’s many reasons why this is a risky and potentially very expensive move. If HMRC find out, you could face monumental fines.
Being on PAYE benefits the nanny too as she will be eligible for statutory benefits such as:
- Statutory maternity pay (which is paid by the government to the employer)
- Statutory sick pay
- Holiday allowance
- Workplace pension
- Redundancy after two continuous years of service
How much does it cost to employ a nanny?
The average gross hourly rate for a full-time live-out nanny is £13.30 in Central London, £12 in the Home Counties and £9.70 in the rest of the UK (figures from the annual Nannytax Wages Survey).
On top of the gross salary the employer has to pay ‘employers national insurance’. A nanny employer in Central London paying the average £13.30 gross an hour working 45 hours a week would pay roughly £60 extra a week in employer’s NI.
To note, the salaries for live-in nannies are vastly lower and vary more as when you provide full room and board then the national minimum and living wages do not apply.
Agreeing a gross salary with your nanny protects the employer from external costs such as student loans or unpaid tax from a previous employment. Traditionally however nannies tend to talk about their salary in ‘take home’ i.e. ‘net’ terms.
Why do nannies talk about net salaries?
When you first start looking for a nanny you may see that lots of nannies will advertise an hourly rate in ‘net’ which means their take home pay. Nearly all other forms of employment in the UK will advertise and be negotiated in ‘gross’ terms. This is the salary including tax and employee’s national insurance contributions.
It is best to talk to the nanny and together work out what the equivalent gross on a standard tax code would be for the net salary is offering because if you agree net and she has a split tax code or she has student loans or any other before tax deductible then you will foot the bill.
Which leads onto another reason why you should always agree a gross salary with your nanny…
New Workplace Pension legislation
In 2012 the government announced new pension legislation, automatic enrolment, which is otherwise known as the new ‘workplace pension’.
It affected the largest employers first and in the next 2 years every nanny employer will need to open a scheme will have to make contributions if their nanny earns over £10,000 a year and is aged between 22 and state pension age. The employee, employer and the state (in the form of tax relief) all make contributions.
Agreeing a gross ensures that you will only be paying the employer contributions on top of your current costs.
For new employers they won’t need to provide a pension until at the earliest 1 November 2017 so there’s plenty of time to understand and manage the process.
Written by Rhiannon Jackson of NannyTax. Nannytax is the UK’s first nanny payroll service with over 20 years expert experience. The service includes fully managed payroll, employment contracts and employment law support to parents who employ home childcare professionals. Nannytax is owned by Enable LTD who also own Stafftax the sister service to Nannytax for domestic employers and Enable Insurance – a liability insurance for nanny employers. Last year Enable LTD launched Enable Autoenrol to help it’s clients to understand set up and maintain their compulsory workplace pensions currently being phased in by the government.