What is Nanny Tax?

When hiring a nanny, the family will be acting as an employer and as such, are responsible for paying their nanny’s tax and national insurance contributions as well as any other financial requirements associated with employing a member of staff.

Nanny salaries are usually quoted as net figures, i.e. the amount of money that a nanny will take home after all taxes have been deducted. Therefore, if the nanny has accepted a wage as ‘net’, the family must be careful to make sure they understand what the gross figure is that they will be paying each month as this will make a big difference to their budget.

Why does the Family have to pay Nanny Tax?

Because in general, nannies cannot be classed as self-employed, the family needs to register as her official employer with HM Revenue & Customs (HMRC) and set up a Pay as You Earn (PAYE) payroll and accounting scheme.

Depending on how much they are paying their nanny, they will then need to calculate her gross and net salary, allocate a tax code, and submit all calculations and payments to the Revenue on a regular basis as a legal requirement.

What is PAYE?

PAYE is the mechanism by which the Inland Revenue collects tax and National Insurance payments from employees directly as they are paid – in other words, the money is taken out from their pay at source. Because the employer of the nanny is ‘the source’, the money is taken directly from them. In addition, the family will also need to pay Employers Class 1 National Insurance Contributions (NIC’s) if the amount they are paying their nanny is above a certain threshold.

Annual Nanny Tax Payments Made?

Besides regular statements detailing exactly how much money has been paid each period to the nanny and how much has been deducted in tax and NICs, any expenses and/or benefits which are subject to tax must also be shown. These may include:

• Bonuses
• Statutory Sick Pay
• Statutory Maternity Pay
• Allowable Expenses
• Overtime

At the end of every year, the employer must also complete a full tax return (P35).

How Does a Payroll Work?

Setting up a payroll system can be complex but there is a lot of advice available for first-time employers. Government bodies such as HMRC and Business Link both have a lot of useful information on their websites and advice lines that families can call. There are also systems offered which can help calculate tax bands and gross/net amounts as well as electronic software to help families with calculations and to make their payments.

Nanny Tax Agents

Many families may find that to establish a payroll system themselves is too onerous a task or else they are worried that they may not get it right. For this reason there are many specialist agencies who will take on the responsibility for an annual fee. These companies will in effect, act as your payroll department and submit all tax returns to HMRC on your behalf as well as issuing the family and nanny with pay and payment slips.

However a family elects to do it, it is of utmost importance that an efficient system is set up, as payments must be made to the tax office regularly and if not, can be subject to fines.