The school holidays are a time when business owners with younger children face the extra burden of trying to maintain operations as usual, while also juggling the need to entertain their children. For many a nanny is a good option, but unlike other forms of childcare where you are effectively paying for service provision, a nanny is your employee, which has tax implications. It is important to be aware of the latest employment tax legislation, which in the case of nannies can be unexpectedly complex, as we explain.
Employers usually pay a nanny’s tax and NICs
Unlike just about any other professional, when a nanny accepts a position, their expectation is usually to have their tax and national insurance contributions paid for as part of their salary package; ie it is customary to gross up their agreed net salary in order to calculate the tax and employee’s NICs payable; and don’t forget the employers’ NICs on top. So, if you agree to pay your nanny a weekly salary of £500, that is likely to be the money they expect to take home after deductions, and the tax payable will be based on the higher, grossed-up, figure. This convention needs to be factored into an employment offer and any contractual obligations.
Nannies can often be higher rate tax payers
It is quite common for a nanny to have a second job as a source of additional income, which can mean they become higher rate taxpayers. If, as their employer you are liable to pay their tax and NICs, this has further cost implications for you. A second job can also mean their personal allowance is eroded, increasing the amount of their salary on which they pay tax. As a result, you may wish to negotiate whether your nanny can take additional employment, and who is liable for any extra tax payable on their salary as a result.
Using your family’s car can constitute a benefit in kind
Over time, if your nanny becomes a bigger part of family life, you might allow them to use your car for work purposes and this could eventually extend to include some personal usage too. In these situations, it can be hard to keep track of the exact usage. Depending on the circumstances and level of personal use, HMRC may view this as a taxable benefit in the same way as they do when any employer provides a company car to their employees. Normally though the employee is liable for the tax so it doesn’t have an impact, but in the case of a nanny, you will typically be paying their tax liabilities too. The type of car provided, extent of use, contribution to upkeep and provision of fuel all contribute to the total tax liability, which can result in a significant extra charge.
Family perks also increase the nanny’s tax costs
As an extended member of the family, nannies are often included in leisure activities and associated subscriptions. If you are a member of a gym or tennis club and allow your nanny access too, they will need to demonstrate whether this access is solely for the purpose of their work on your behalf, or partly for their own amusement. The same applies to holidays and other benefits such as private health cover, even separate living accommodation, which unless provided specifically for the purpose of enabling them to conduct their work for you, could become a taxable benefit.
Auto-enrolment for personal pensions
All employers must provide a personal pension for their employees and are now responsible for setting up and contributing to an auto enrolment pension scheme. As your employee, a nanny will be entitled to be given access to a pension scheme, into which you are both required to make minimum contributions, calculated on a scale, according to salary levels.
Lesley Stalker is a tax partner at RJP LLP.
Further reading on tax
