When salaries are discussed the amount quoted is usually a gross figure – ie the amount an employee gets before deductions such as income tax and National Insurance. But sometimes nanny salaries are advertised as net pay. This is where a ‘take home’ figure is agreed, meaning the employer has to cover any extras out of their own pocket.
There are several reasons why we discourage arranging a net pay agreement with your nanny.
First, we often find that nanny employers are confused by refunds arising from previous employment. If your nanny gets a tax refund processed from a P45 for previous employment when he or she first starts working for you, this refund will go direct to your nanny and not to you, even if you pay your nanny’s tax under a net pay agreement.
Other reasons why net pay agreements are not a good idea:
- All deductions have to be paid by you – tax, National Insurance as well as student loan and workplace pension contributions.
- If there’s a change to your nanny’s tax code and more tax becomes due, then you’ll need to pay the tax.
- If your nanny owes tax from previous years, before starting work with you, you’ll have to pay that tax back.
- If you enrol a nanny into a workplace pension scheme then you’ll have to pay the contributions, which will increase over the next few years.
Net pay agreements can be bad for nannies, too:
- Your nanny won’t see the benefit of an increase in the Personal Allowance or reduction in basic rate tax.
- Quoting a net salary when applying for a mortgage or other loan will reduce the amount your nanny can borrow.