Sharing The Cost Of A Nanny
In the UK an individual has a personal tax code (1185L in tax year 2018-2019). This code means that they receive just over £11,850 tax free each year via PAYE. After the tax free allowance is used up each week/month we then have tax bands, a percentage of income that is deducted.
If a person has a second job however, the Income Tax in that second job starts at the 20% band leaving out the tax free allowance as it is assumed the primary employer will have already used it. For a second employer paying a net salary (i.e parent picks up the tax bill) this will mean one family pays a disproportionately higher tax bill than the other.
For example if you pay a nanny £250.00 per week net using a full tax free allowance you can expect taxes of around £36.92 per week on top of their net wage. If you pay the same salary with no tax free allowance this increases the costs to £113.22 per week, a huge increase.
The task that NannyPaye aims to help you with if finding a mid point that is fair for all employers involved. It’s important to note that whatever is finally worked out, any allocation of a tax code other than 100% will mean that the taxes in addition to your nanny’s pay will be higher than if she were only working for you.
Nanny Share Options
When organising a nanny share NannyPaye is aiming to achieve a fair result for all parties concerned. This may be two or more families and of course the nanny.
To achieve this our first step is to move the proportions of tax free allowances away from a 100% allocation to one employer and distribute them pro rate between the employers involved. By doing this each employer has at least some of the tax free allowance that they can use before paying 20% tax on the nanny’s pay. This is obviously not as good as being the only employer and having 100% of the allowance but it is also far better than being classed as the second employer and receiving none of the allowance.
The next move is then to decide if you wish to:
(A) Stay with your net agreement and so ask NannyPaye to give your nanny advice on how to split the tax code with HMRC so we can run it for payroll purposes. Unfortunately we are not able to split the tax code for her as HMRC will only allow the employee themselves to do this.
(B) Note the new gross wage amounts and revert to a gross agreement that leaves your nanny overall with the correct net pay. Each families cost would remain the same as if you had a tax code split in place.
(A) Tax Code Splitting ‘our speciality’
Most nannies agree a net wage with their employers because they want to understand what they are being paid, with nanny shares being no exception. To keep the employers costs at a reasonable and fair amount your employee can apply to HMRC to put in place the split tax codes we calculated during the above process. This means that you can keep paying your nanny the same net wage and the taxes will be calculated using a pro rate amount of the tax free allowance. This has the obvious benefit to both employer and employee of being straightforward and easy to manage. Unfortunately this does involve your employee contacting HMRC which can be very difficult if they do not have a thorough understanding or if they do not manage to find someone helpful at HMRC, if your employee struggles with this we can arrange for HMRC to allow us to call them (for one call only) on her behalf. In some instances HMRC refuse to spit the tax code, this usually happens if the nannies gross salary with at least one of the employments is over the tax free allowance amount.
(B) Change your agreement to a new gross amount
To avoid the need to involve HMRC in splitting tax codes employers can choose to change the agreement they have with their nanny to a gross basis, however, set at the new higher gross salary that they would have paid should the tax code split have been implemented.
For example, your nanny’s net wage may have been £250.00 per week net with a higher gross of £312.00 due to 40% of the tax free allowances being allocated to you (based on the 2018/2019 tax year standard code of 1185L being split).
The other family may have a different agreement with £375.00 net and £482.45 gross (based on 60% of the tax allowance in the 2018/2019 tax year, splitting the 1185L tax code). The employers involved can now choose if they wish to then fix the pay at the gross amount and simply apply the normal 1185L and BR tax codes to the pay (1185L is the standard tax code for the 2018/2019 tax year).
This then has the effect of:
- Employer 1 Paying more to the nanny and less to HMRC
- Employer 2 Paying less to the nanny and more to HMRC.
Overall however the nanny will receive the same net amount of £625.00 per week and the employers have the protection of a gross agreement.