Tax Guidance sheet

Your Nanny’s Tax and National Insurance Contributions

If you employ a Nanny in the U.K and you pay her more than Ł100-00p per week (tax year 2007-2008) you have the same legal responsibilities as a commercial employer and the law requires you to: register as an employer, set up and operate a PAYE scheme on your Nanny’s behalf, keep tax records on her behalf, provide her/him with regular pay slips, provide her/him with an employment contract, pay regular Income Tax and national insurance contributions, pay employer’s national insurance contributions, file an employer’s annual tax return.

Nanny Share

When two families share a Nanny to look after their children,(a Nanny share), it is recommended that each family set up their own PAYE scheme. When a Nanny works for more than one employer in the same week, especially in two entirely separate part-time jobs, then each employer has to account to HMRC for tax and national insurance. The amount of tax deducted will be affected by the Nanny’s total earnings in the week over both jobs as well as whether the nanny’s personal tax-free allowance is allocated entirely to one (main) employment, or split between both employments proportional to time worked for each employer. In most case the former option is recommended.

For most jobs the main employer usually applies the full personal allowance (currently Ł100-00p) per week for a person on a standard tax code as well as the lower rate (10&pct;) tax band to a part of the wage. The second employer then applies the basic rate of income tax (currently 22%) of the gross income.

Many employers agree a net salary with their Nanny, which then has to be ‘grossed up’ by paying Tax and national insurance contributions on top of the net wage. This means that if the main employer is using all of their Nanny’s personal tax free allowance, the second employer paying an agreed net, will end up paying substantially more tax, having to pay basic rate tax from the first penny the Nanny earns.

This potential problem applies to both Nannies with two part-time jobs and to Nanny shares where each employer has a separate PAYE scheme.

The best solution is for both employers to agree a gross wage with their Nanny and for one employer to be designated as the main employer using all of the nanny’s tax code, her personal tax free allowance . Although the Nanny will be paying more tax in her second employment and therefore taking home less pay than she will with her main employer, she is being correctly taxed, and contributing the correct amount of national insurance over both jobs.

Nanny employers are sometimes reluctant to agree a gross wage or to apply a basic rate code, if they are the second employer, on the grounds that their Nanny’s expectations are based upon net or (take home pay). Nannies are no different to any other employee in the UK with respect to HMRC and employers are strongly recommended to insist on agreeing a gross wage.

Tax Vouchers and Approval schemes

Childcare vouchers are one of the ways in which employers can assist their employees with the costs of childcare. As from April 2005 the first Ł55-00p per week in childcare vouchers supplied by the employer will be exempt from both tax and nationa insurance contributions for employees. Vouchers supplied in excess of Ł55-00p per week will be taxable and liable for national insurance contributions for the excess.

The childcare voucher scheme works like this:

Your employer will normally sign up to a childcare voucher company and will pay that company an administration fee for their service. The voucher company will either supply you directly with your childcare vouchers or they will provide your employer with them which they will distribute to staff accordingly. Employees in receipt of childcare vouchers may be able to use them to “pay “ their nanny The nanny will then redeem the value of the voucher from the childcare voucher company usually by direct payment into their bank account.

Childcare vouchers can be offered to you in addition to your cash salary but are more commonly offered as a ‘salary sacrifice’. This means that you sacrifice a specific amount of your salary and instead receive that amount in child care vouchers. Childcare vouchers are exempt from national insurance contributions so you will only pay national insurance contributions on the reduced level of your salary saving up to 11% on national insurance contributions.

Childcare Vouchers can be used for registered or approved childcare i.e. in the case of a Nanny she/he must be registered with Ofsted and comply with their regulations. She/he will also need to register with the voucher company The first Ł55-00p per week will be exempt from national insurance contributions and tax. If an employer has offered a childcare voucher scheme they must provide this benefit to all their employees where the scheme operates. For more detailed information visit www.inlandrevenu.gov.uk/childcare for more information.

Your Nanny will need to be “approved” through the “Ofsted childcare register” .She/He will also need to register with the voucher company in order to reimburse the value of the vouchers they receive.

Child Tax Credit and Working Tax Credit

The child tax credit offers parents support with general family costs ‘working tax credit ‘ supports those on a lower income and working parents may be eligible for additional help towards registered childcare costs. The amount of help parents receive will depend on a number of factors including their income, size of their family and the amount they pay in chilcare.

The receipt of childcare vouchers through a salary sacrifice scheme can affect parent’s entitlements to these tax credits in a couple of ways as your average earnings will effectively be reduced. You could receive a higher payment through the working tax credit However the value you receive in childcare vouchers from your employer cannot be declared as childcare costs when calculations are made for your entitlement to the childcare element of the working tax credit. The childcare element of working tax credit may therefore be reduced.

Parents are advised to find out what level of support they could be entitled to through the child tax credit and working tax credit schemes before they sign up to a childcare voucher salary sacrifice scheme. In some instances parents may be financially better off opting to receive help through the working tax credit rather than through their employers childcare voucher scheme. For more information on tax credits visit www.taxcredits.inlandrevenue.gov.uk or call 0845 300 3900.

Child tax credit parents can receive help towards the general costs associated with bringing up children and could be eligible for this help regardless of whether they work or not. The amount of help parents receive will depend upon their circumstances. Families with incomes of up to Ł58-000p could still be eligible for some help and this income level rises to Ł66-00p for those families who have a child under the age of one. Child tax credit is paid directly into the bank account of the main carer rather than through the wage packet.

Working tax credit provides a top-up to wages for those on low incomes. Extra support is available for working parents and for disabled people in work. Most sections of the working tax credits are paid through pay packets or directly to those who are self -employed. The amount people receive depends on their circumstances.

Exta help is available through a childcare element within the working tax credit for working parents to assist with the cost of registered and approved childcae. It can offer up to 70% towards the costs of childcare up to a maximum level of Ł135-00p per week for one child and Ł200-00p per week for two ore more children so if you have one child in childcare you could receive up to a maximum of Ł94-50p per week and with two or more children in childcare you could receive up to Ł140-00p per week.

For more information on child tax credit and/or working tax credit visit. www.inlandrevenue.gov.uk or call tax credit helpline on 0845 300 3900.

As becoming an employer for the first time can be confusing we recommend Nanny Tax who will deal with all these complex issues for you. They can be located at www.nannytax.co.uk or 0845-226-2203.Nanny Tax is a payroll service it offers support for parents who employ Nannies. They will register you as an employer with HMRC and all correspondence and paper work will then be sent to them. They will keep payroll records on your behalf, provide you with payslips for your Nanny, Process a P45 when necessary, send a quarterly summary of tax and national insurance due to HMRC, electronically file an employer’s annual return (p35) and employee’s pay deductions summary (p14) with HMRC at the end of each tax year and provide you with a summary(p60) for your nanny. Keep you up to date with tax rates, provide legal advice, give you concise information on any employment issues, help with Nanny contracts.