Taxation and National Insurance
Gross vs Net Pay
Nanny salaries have in the past been agreed on a net basis. The net figure is your take home pay. Following changes to legislation and to bring nannies in line with other professions you should agree a gross figure in your contract. You can work out your net pay from the gross amount using an online calculator such as ListenToTaxman.
A gross figure includes your net pay, your income tax, your National Insurance contributions, your workplace pension and any other deductions.
Agreeing a gross figure means your employer knows the total cost of employing you and avoids cash in hand arrangements which jeopardise your rights to sick, maternity, paternity, adoption or shared parental pay and access to benefits should you lose your job. It also means that you benefit from any agreements in the Personal Allowance (which has nearly doubled over the past 10 years).
Income tax on your employed earnings is automatically deducted and paid to HMRC by your employer. If you have other sources of income such as self-employed work or rental or investment income then you will also need to complete a self-assessment tax return.
At the end of each financial year that you are employed you should receive a P60 which acts as proof of your earnings and shows the income tax you have paid that year. At the end of a job your employer should give you a P45 which shows how much tax you have paid in the financial year so far.
If you earn under the Personal Allowance (£11,000 in tax year 2016/2017) then you will not have to pay tax. If you are unsure how much tax you should be paying you can use the HMRC Tax Checker tool.
Occasionally you may overpay tax, which is usually due to a tax coding error. In this case you will get a tax rebate. Under a gross pay agreement this money definitely belongs to you.
Each year you are allocated a tax code which shows how much you can earn before you need to start paying tax. A standard tax code for 2016/2017 is 1100L. This means you can earn £11,000 over the year before you pay tax. As tax is averaged over the year you will still start paying tax in April, but a small part of your weekly or monthly income will not be taxed.
At the start of a job, or if you have two jobs but one employer is allocated all of your personal allowance, you may see tax code BR. This stands for Basic Rate and means all your earnings are being taxed at 20%.
If you have more than one employer you may split your tax code. The number in your tax code shows how much you can earn in that job before you pay tax, so a tax code starting 440 means you can earn £4400.
Adding up the numbers in your tax code should give you the numbers which make up the standard tax code for someone with one job. For example, a 440 tax code (£4,400) and a 660 (£6,600) tax code add up to 1100 (£11,000 which is your total personal allowance).
The letters on your tax code may explain any adjustments to the numbers. L is the standard code, S indicates you live in Scotland and pay the Scottish rate of Income Tax, M indicates you receive Marriage Allowance, N indicates you have transferred your Marriage Allowance to your partner. Your first payslip may show the code 0T, which means your employer did not have correct information about your tax code for the first payroll run. If you have any questions about your tax code you should contact HMRC.
A tax code starting with K indicates you receive Benefits in Kind that are taxable.
National Insurance: employee contributions
National Insurance is currently calculated on a per job basis. This means if you have two or more employers, for example several part time jobs or you are part of a nanny share, the thresholds apply to the pay you receive from each employer.
If you earn over £155 per week you are liable to pay National Insurance contributions. Your employer deducts these and shows the amount you have paid on your payslip. If you are employed and self-employed you must pay National Insurance contributions as an employee but may be able to apply for an exemption certificate for your self-employed work. If you earn between £112 and £155 you are treated as having paid National Insurance contributions. This means you continue to accrue rights to your State Pension as well as statutory payments. If you earn under £112 you can choose to pay Class 3 National Insurance (also known as voluntary contributions). If you continue working after State Pension age you do not have to pay National Insurance.
You must check that your National Insurance number is correct on your payslip to ensure you are being credited with your contributions.
National Insurance: employer contributions
Your employer must also pay National Insurance contributions. These are not part of your gross wage.
Student Loan repayments
If you have received finance for higher education studies you must start making repayments once you reach the salary threshold. As long as your employer is aware that you have a Student Loan this will be done automatically through PAYE.
Salary Sacrifice Schemes
Nannies can ask their employers to set up a childcare voucher scheme so they can benefit from salary sacrifice. If your employer does this your salary will be reduced, and you will pay less tax and National Insurance, in return for childcare vouchers. The amount you can get depends on your earnings:
- £243 each month for a Basic rate taxpayer (earning up to £43,000 per year)
- £124 each month for a Higher rate taxpayer (earning between £43,001 and £150,000 per year)
- £110 each month for an Additional rate taxpayer (earning over £150,00 per year)
Childcare vouchers in their current form will close to new entrants in 2017 to be replaced by Tax Free Childare, which will be open to everyone.
Tax on Benefits in Kind and mileage payments
If your employer provides you with a benefit, such as a car for private use (including commuting), a low-interest or interest-free loan for more than £10,000, living accommodation that is not required to do your job (such as a separate flat) or medical insurance (except for travel abroad) then you will be taxed on the value of the benefit.
Mileage paid at the HMRC recommended rate is not taxable, currently 45p per mile for the first 10,000 miles and 25p per mile for any miles over 10,000 travelled in your car, and 20p per mile travelled by bicycle. If you receive more than the HMRC rate you will be taxed on the overpayment. If you are paid less than this you can claim tax relief on the difference by submitting form P87.