Working Parents: How to pay the hand that rocks the cradle

If you employ a nanny, you have to negotiate the tax system. By Amanda Suttie

Choosing a nanny is child's play compared with officially employing one. It is estimated that about 100,000 people in the UK currently employ a nanny, many with little or no previous experience of employing anybody. It is the employer's responsibility to pay the tax and national insurance as nannies cannot be self-employed.

Most nannies and agencies quote net salary figures so expect to pay tax and national insurance contributions in addition. As a rough guide add a hefty one-third on top. If a nanny asks for a salary of pounds 200 pw net, the cost to you is not far short of pounds 300. At pounds 270 pw net, the cost rises to an alarming pounds 402. All this comes out of your own, already taxed, income, so it is not surprising that some employers try to pay nannies in cash or do not declare the full extent of their earnings.

According to Christine Little, chief executive of Fres (Federation of Recruitment and Employment Services): "A reliable employer would pay a nanny properly. The nanny is vulnerable if something goes wrong and it's hardly a good basis for a relationship based on trust. The nanny should receive a payslip every time she is paid and a P60 at the end of the tax year. Where advice is needed, the tax and NI agencies are very helpful. If contributions are not paid the nanny may not be able to claim benefits in the future."

Not surprisingly the Inland Revenue is keen to ensure employers act responsibly . I asked Ayesha Owusa Barnaby, press officer for the Inland Revenue, what could happen to someone "on the fiddle".

"There are all sorts of ways we find out, either by accident or design. The records might not add up and we would ask questions. The nanny might leave a job and then say she had previously been paid a higher salary than we have on record. Sometimes a nanny may even tell us. If we discover this we would want to collect any tax due along with interest and penalties."

Gilly MacWilliam, director of Kensington Nannies, sends out leaflets and information to prospective employees about their responsibilities. "When the nanny registers with us we always tell them not to take a job with someone who offers to pay them cash. We had one nanny who stayed in a job for five years. When she left it came to light that the employers had not paid any contributions. The nanny didn't realise and the employer received a bill for pounds 16,000. It was terrible - the family would have nothing more to do with the nanny and refused to provide references."

Coping with PAYE codes, tables, deductions and net and gross figures can appear to be all too taxing but, before you reach for your accountant's number, help is at hand. For about pounds 100 a year it can all be done for you. Two companies, the Nanny Payroll Service and Nanny Tax, offer a full service with no hidden costs. They provide information and advice, issue P45s and P60s, pay slips, monthly payroll reports and year end returns.

Doing It Yourself

I asked Ayesha at the Inland Revenue just how easy it is to "do it yourself". "It's not as daunting as it seems. If you need help, you can make an appointment at one of our inquiry centres (attached to local tax offices) or telephone our employers' helpline on 0345 143 1443."

A leaflet "Thinking of taking someone on" is available from your local tax office. It explains about PAYE, tax and national insurance contributions for employers. Fres provides information to parents on employing a nanny, choosing a nanny agency and a list of member agencies.

Another useful contact is Pann (Professional Association of Nursery Nurses). Tricia Pritchard is their professional officer: "Employers, nannies and agencies contact us for information on all fronts: employing nannies, advice on good practise, salaries, insurance, tax and NI. We send out an information pack including specimen contract of employment."