Employing a Nanny: a Tax Guide for Parents

When you employ a nanny, you need to make sure you offer a competitive salary that meets legal requirements, but remains within your own budget. You should consider income tax and national insurance to make sure that the net salary you are offering is valuable and fair to your candidates, and ensure you understand the tax implications for you and your employee. In deciding what you are willing to pay, remember to factor in any other associated costs, such as travel, that your nanny may incur.

In the following guide, our nanny employment experts outline all of the tax and financial considerations you will be required to make when employing a nanny. We also cover the legal obligations you will face when you become an employer.

What is the difference between gross salary and net salary?

When you are deciding how much you can afford to offer as a salary for a nanny, you must consider what you will need to pay to attract high-skilled candidates, of which a crucial aspect is what they will receive once taxes and other outgoings have been deducted. When you offer a salary, you may be surprised to find out that you will have other costs associated with it; you will also be expected to pay national insurance contributions, which are a separate cost from the nanny's own national insurance deductions.

You should plan your employee's salary to consider the total cost of employment to ensure you meet your budget, but you will also need to consider your employee's net salary - how much they actually take away when being paid.

  • Gross salary = net salary + employee's tax and national insurance
  • Total cost of employment = gross salary + employer's national insurance
  • Net salary = what is left for the nanny to take home

If you do not account for the income tax and national insurance that is deducted from your nanny's gross salary, you may find that the salary you are offering does not meet their needs and subsequently; you will receive less interest in the job role. If you offer a higher net salary, you will incur higher costs but you will attract more candidates, including those who are more experienced.

You should always make sure to consider the needs of your employee. If you treat them better, they are more likely to show more enthusiasm towards their work and you will be able to build a better working relationship with them - something essential to the success of having an employee in your home. Even more importantly, you will be able to rely on your nanny to build a strong relationship with your children.

Other financial needs your nanny may have include:

  • Travel costs
  • Meal costs
  • Childcare costs - money to take your children to places where there may be a fee, or to purchase things for them
  • Pension scheme contributions

You should make sure you have a budget for these costs.

If you are hiring a nanny who will be living on your premises, you must make sure the space they will be residing in meets all of their needs and is kept up to a good standard. Otherwise, you may get in trouble with the law, and your reputation as an employer will certainly suffer.

Additionally, you may want to offer benefits to your prospective employees, such as travel costs and extra holiday allowance. Nannies Matter can advise you on how to make your job role more attractive to professional nannies, ensuring you get the best candidates possible for you and your family.

What tax is applied to a nanny's salary and how do you pay it?

Like any employee, you must deduct income tax from your nanny's salary. Income tax is charged at a basic rate of 20% on all gross annual income between £12,571 and £50,270. If you pay your nanny a yearly gross salary of more than £50,271, they will incur a higher rate of income tax, which is 40%.

National Insurance is also deducted from the gross salary, alongside income tax. Currently, employees who earn between £1,048 and £4,189 per month pay National Insurance at a rate of 12% before tax.

As the employer, it is your responsibility to pay your employee's Income Tax and National Insurance contributions on their behalf. You can do this by setting up an account with Pay As You Earn (PAYE). This is the most common method used to pay tax and national insurance in the UK. PAYE is a digital system that allows you to automatically calculate the taxes from any payments made to your employee, and allows you to set up payments to HMRC via a payroll software. You will be required to report how much you are paying your employee to HMRC.

The best way to manage these comlicated aspects of your expenses is to work with a professional accountant who will be able to easily calculate and pay your expenses to the right parties on your behalf.

What are your legal responsibilities when employing a nanny?

If a nanny works in your home and does not do so through an agency, you will be considered their employer.

You are classed as an employer if:

  • You pay your nanny directly
  • You pay your nanny directly with finances from the NHS or the council

This means you have a number of legal requirements to fulfil, including understanding and upholding your employee's rights.

An essential part of the employment process is creating an employment contract. This can be a daunting process and it can have significant legal repercussions if you get it wrong, so it is best to work with employment professionals to make sure everything you need to cover is included.

Within the employment contract, some of the key points you will need to include are:

  • The agreed salary - this can be the gross salary or the net salary, but you should specify which
  • The number of contracted hours the nanny will work
  • The date they will begin their employment
  • Holiday entitlement
  • Benefits offered

Alternatively, a nannying agency like Nannies Matter will be able to support you with this, and provide a standard contract that takes away the difficulty of preparing such a document yourself.

Work with an agency

To ensure that your candidates are prepared for the job and meet your requirements, work with a nannying agency to get access to a selection of vetted professionals. At Nannies Matter, we work with nannies who care passionately about their responsibilities, and will discuss your needs and expectations carefully to ensure we can pair you with the right professional for your family.

For further advice on how to meet your obligations when employing a nanny, call us today on 0800 121 4881, email us with your enquiry at info@nannies-matter.co.uk or fill out an online contact form and we will call you back at a time convenient for you.

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