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Nasty payroll surprises and how to avoid them

2014 October 28

It’s the time of year when parents are doing their first payroll run with a new nanny and if your initial sums were out it can be an unpleasant experience discovering that you’ve got a higher bill than you thought you had.

Problem #1 Nanny has another job

Even if it’s a Saturday job, if she had that job first she’ll be on a BR tax code with you, which means no tax free allowance and all earnings taxed at 20%. It used to be possible to split tax codes but HMRC are very reluctant to do that since real time information (RTI) was introduced. If you agreed a net salary then you are liable for all the tax and National Insurance contributions, which can be a lot more than you bargained for.

Problem #2 Nanny has a student loan

Student loan repayments kick in above £325/week (£1,409/month or £16,910/year) gross.  9% of the amount above this salary needs to be paid to the Student Loans Company on the nanny’s behalf, and you’re also liable for this if you agreed a net salary, which if a nanny is earning £2,250 a month is an extra £75. Nannies with degrees are becoming increasingly common, and most of those who have studied in the UK will have taken out a student loan. An even nastier surprise is where you think you’ve employed a nanny and are paying under the repayment threshold but overtime has pushed them over.

Problem #3 Nanny has a special code      

HMRC allocate codes based on an individual’s situation. Most people with one job will have a standard tax code (for 2014 this is 1000L), however if a nanny has to pay back tax which was underpaid in previous years or receives benefits in kind they may have a special tax code which reduces their personal allowance (for example 700L which means they have a personal tax allowance of only £7,000 for the year), increasing your tax liability if you have agreed upon a net salary.

The simplest way to avoid any nasty surprises your end is to agree a gross salary in the contract. That way you know what your costs are, and you deduct the amount of tax (and anything else) your nanny is required to pay rather than adding to your bill.

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