payroll, pensions and protection

Pensions, Payroll and Protection – All important factors in the realm of Nanny Employment

Pensions

New legislation means you not only have to pay your nanny's tax and national insurance, you also have to pay your nanny's pension. This is due to an update of the Pensions Act, which requires every employer in the UK to provide a workplace pension for their employees, and that includes families who employ nannies. Although you might not see yourself as an ‘employer’ as such, in the eyes of the law you are, even if you just employ one person like a nanny (or a carer for an elderly relative). As such, you will need to start paying into a pension scheme at some point from June 2015 onwards.

Does it apply to all nannies?

It’s compulsory in the UK if your nanny is:

aged between 22 and state pension age
earning more than £10,000
entitled to a pension

If your nanny is aged under 22 or earns more than £5,824 but less than £10,000, it’s not obligatory. However, your nanny is entitled to ask you to set up and pay into a pension for them — and if they do, you have to arrange it.

How does this work for nanny shares?

If you are part of a nanny share, how you pay your nanny’s pension depends on what kind of nanny share you are part of. It’s worked out in different ways depending on whether your nanny has one employment or two separate employments. If the nanny has just one employment, they should be getting just one payslip each pay day. This time, the [nanny’s] total earnings are assessed. Just one [pension] scheme is required, and although it will be used for all earnings, it makes most sense to set it up in just one family’s name. That means it can be used over again when this nanny share finishes. However, if the nanny receives several different payslips from more than one family, each employment is looked at separately. That means that each employer must make an assessment based solely on what they pay. It will normally be set up under the employer’s name, with the nanny enrolled as a member. When [the nanny] leaves, he/she leaves that employer’s pension scheme. The replacement can then be added to the pension scheme instead. In other words, each employer has their own pension scheme, and they can use it for as many nannies or other household staff as they want. If they don’t recruit again, their pension scheme just lies dormant. It can seem pretty complicated so it’s often advisable that anyone with a nanny share gets an expert involved, by signing up to a payroll company. We always advise any parents who are entering into a nanny share to sign up to a reputable payroll company such as Nannytax, who are best placed to advise them on how to split the salary and the tax. This will become even more important with the pension laws coming into effect, as the payroll company will have to look at the amount of salary they pay, and what their pension contribution will be.

How will I know when I need to start paying?

You’ll be contacted by the Government-run Pensions Regulator, who will let you know when you need to start paying into a pension scheme for your nanny. The scheme is being rolled out gradually, so people are being contacted over a period of time. You don’t need to to pay anything until you hear from the Pensions Regulator, and the scheme won’t be backdated. At some point, you’ll be sent a letter to let you know when your ‘staging date’ is. The staging date is the date you need to start making contributions and the letter will arrive around a year before your staging date. Staging dates are calculated from your PAYE reference. If you want to start planning now, you can find out when your staging date is – by entering your PAYE reference on the Pensions Regulator site.

What do I need to do when I get the letter?

There are several things you need to do before your staging date to comply with the law, including choosing your pension scheme. This will all be explained in the letter that has been sent to you. If you have any concerns, you can contact the Pensions Regulator on 0845 600 1011.

How much will I need to pay?

Up until 2017 you’ll need to pay 1% of your nanny’s salary (minus £5,824) into a pension (but this will rise). By 2017 you will need to pay 2% and by 2018 this will rise again and you will have to pay 3%. For example: If you pay your nanny £20,000, the pension contribution is worked out from £20,000 minus £5,824 = £14,176

Before 2017 – 1% of £14,176 = £141.76 per year, or £11.81 per month
In 2017 – 2% of £14,176 = £283.52 per year, or £23.62 per month
In 2018 – 3% of £14,176 = £425.28 per year, or £35.43 per month

The sums are relatively speaking quite small, but as working parents are already struggling to cover the costs of childcare, this just adds an extra burden on their finances. Parents also worry about the administration of the pension scheme. We have advised parents to speak to their payroll companies who should be able to provide them with a pension solution.

What happens if I don’t pay?

You’ll face initial fines of £400 and will still have to pay the fees.

What about paying the nanny in cash?

We all know there’s a thriving black market in paying people in cash, and a government survey in 2009 suggested that around 20% of nannies were not paying tax or national insurance. But HMRC (HM Revenue & Customs) has threatened to crack down on those avoiding paying their nanny’s taxes, commenting: “We expect to catch more parents who are avoiding PAYE [tax]. It’s not particularly hard to find them.” According to gov.uk, you as the employer are responsible for deducting and paying your nanny’s income tax and national insurance contributions. If you don’t declare to HMRC that you’re employing a nanny, you face being charged with tax evasion and could end up paying all the money owed plus a hefty fine. There’s also concern that parents may pressurise their nannies into setting up a limited company and officially becoming self-employed, so that they can avoid having to make any contributions. Note that gov.uk says employers cannot ask their employees to become self-employed.

Payroll

It can be a tiresome process trying to find the perfect nanny to take care of your little ones. Once you have found your ideal match, you'll need to take care of the payroll and tax withholdings before your nanny can start. We have compiled a step-by-step guide should you decide to tackle this alone, or alternatively, you may decide to commission help in the form of a nanny payroll company.

Step 1: Confirm you have tax and payroll responsibilities

Before you start the payroll process, you want to be sure you are required to pay the 'nanny tax'. Some nannies work part-time or unusual hours making many families unsure of their exact legal and financial obligations. The simple approach is to take a look at your nanny’s wages. Will they add up to £10,000 or more in a calendar year? If so, you are required to withhold taxes from their salary and pay employer payroll taxes.

Step 2: Talk to your nanny about how payroll works

Some nannies unfortunately are paid under the table and don’t understand how professional payroll works and why it’s actually beneficial to caregivers to be paid on the books. Make sure to discuss the difference between gross wages (before taxes) and net pay (after taxes) so your nanny isn’t caught off guard when they receive their first paycheck. This is also a good time to go over things like overtime pay and paid time off, which should be detailed in a nanny contract.

Step 3: Find a household payroll service if you need help

Yes, you can handle your nanny’s payroll and the subsequent tax process on your own, but this means a long road of preparing tax returns, performing payroll calculations and familiarising oneself with the ins-and-outs of household employment law. An accountant might also be able to help, but many are not experienced in this specific area of the tax code. Additionally, some accountants are not set up to manage payroll or provide the ongoing support and guidance on employment law issues that most families need. Nannytax can help take all the work and worry out of being a household employer by handling all aspects of nanny taxes for you. Please ask for more information.

Step 4: Gather the necessary documents

To set up payroll and be prepared for regular tax filing, you’ll need to compile certain information about yourself and your nanny.

For you, this includes:

Your primary contact information. If you file “Married Filing Jointly,” your spouse must also provide their personal information.
National Insurance number(s).
tax identification numbers.
Your employee’s wage details

For your nanny, you’ll need:

P45 form, which will come from the nanny's previous employer
income tax withholding details (this should be found on the P45).
National Insurance number.
Mailing address so you can send payslips contract and any other important correspondence

Once all information is gathered you must report the wage and deductions to HMRC for complete, transparent regulatory matters.

Step 5: Verify your nanny’s work eligibility

Before your nanny begins to work, you’ll need to verify they’re eligible to work in the UK ensuring the types of work they're allowed to do, and how long they can work in the UK for. You'll need the job applicant's date of birth and right to work share code. These details are not sent to any government agency, but must be presented to authorities if your nanny’s employment eligibility is ever questioned.

Step 6: Track hours closely to manage overtime

Whether you use a payroll service or not, you’ll need to make sure to factor in overtime if your nanny works more than 40 hours in a week. When this occurs, you must pay them time-and-a-half (1.5 times their hourly rate) for those additional hours. Live-in nannies generally are not entitled to overtime, but are simply paid for every hour they work.

Step 7: Calculate and track taxes

If you handle payroll on your own, you’ll need to calculate the taxes withheld from your nanny and the taxes your incur as a household employer so you can file employment tax returns.

Having a written contract of employment in place is a legal requirement, no matter how informal the relationship feels. A good contract will ensure both parties know what is expected, preventing misunderstandings at a later date. The document has to be given to the nanny on or before their start date, and should include important details such as gross salary, which is agreed mutually and will depend on many factors, such as experience, qualifications, availability and geographical location. If you are unsure what to offer, one of the team will be more than happy to provide advice regarding going rates and general availability etc. Make sure you agree a gross rate, not a net rate. Gross Pay is the amount before deductions, and Net Pay is the amount of pay the nanny actually takes home. If you agree that net rate, either you or the nanny could lose out significantly. Here’s why:

A net rate means that the employer pays the tax and NI on top, no matter how high it might be. That means the employer could end up paying tax that arises from a previous year, before the nanny started. That’s why no business would ever agree a net rate.
A net rate means that the nanny misses out on any tax refunds, e.g. due to a period of lower earnings or a gap between jobs.
A net rate means that the nanny misses out on the increase in the personal tax-free allowance each year. That’s normally worth £10 per month in extra net pay, but in recent years it has been much higher. The cumulative effect of this is that ‘net pay’ nannies have lost out on substantial amounts of earnings over the past few years.

Your responsibilities as an employer

HMRC need you to register as an employer as soon as your nanny starts, make monthly deductions from the pay and submit copy payslip information on or before each pay day. A nanny payroll company can do this for you and can guide you on exactly what to pay and when to pay it. Your nanny has various employment rights, such as paid holidays and the right to be paid the National Minimum Wage. If you choose to commission a nanny payroll provider, they should be your first point of call as many will be able to create a pension scheme for you and show the pension payments on your nanny's payslips. If you are running payroll yourself, the pensions regulator has guidance for employers.

Setting up payments

Monthly Pay Monthly pay, in arrears, is by far the best and most common practice. You can pay 1/12th of the nanny’s annual salary each month, or you can pay your nanny according to the actual hours they will work, or something in between. Pay Day A month end pay day is recommended, e.g. the last working day in the month, or, if you prefer a fixed date, the 28th. Transferring the net pay You can arrange a bank transfer from your account to the nanny’s account. After the first month or two, the core net pay will normally settle at the same amount every month. At that point you may decide to set up a standing order to the nanny, and adjustments can be made as and when required. Cash in Hand There’s nothing illegal about paying an employee in cash, provided those payments go through a payroll. However, ‘cash in hand’ payments, made without informing HMRC, are definitely not allowed. A parent is breaking the law when they pay their nanny ‘cash in hand’ (and a nanny may also be breaking the law by accepting such payments). Tax-free Childcare Provided your nanny is registered with the relevant authority, you can make the monthly net pay transfers and payments to HMRC using your tax-free childcare account.

Protection

When you employ someone in your home it is a legal requirement to have Employers’ Liability Insurance. Employers’ Liability Insurance will help you pay compensation if an employee is injured or becomes ill because of their job. Under UK law, all employees must be covered under an Employers' Liability policy to provide protection for damages and legal costs that arise as a result of claims from your domestic staff suffering an injury or disease arising out of their employment.

If you have household insurance, please check with your insurer or broker that you do not currently have Employers' Liability for Domestic Staff under your existing policy.