There are a variety of tax efficient options to consider when planning for childcare. Where the provider is a business providing a service, e.g. a nursery or registered childminder, and is registered for childcare vouchers, it is possible to offset part of the cost using salary sacrifice. We have blogged using childcare vouchers before.
Some parents prefer the flexibility of a nanny because they will often work from your home, as opposed to a childminder, who typically works from their own home. Typically however, a childminder working from their own home will be registered as self employed, whereas if a nanny is your preferred option, you will become their employer, in just the same way as you would if you were running a business and employing staff. In this case therefore, it is important to be aware of the employment legislation and also of course the tax rules as they apply to employers. In the case of nannies, these can be unexpectedly complex.
This article highlights five of the main tax implications to be aware of when considering a nanny as a childcare solution.
- Nannies are usually paid net
It’s a historical convention that when you interview a nanny, they are likely to have a net weekly salary expectation, for example £400 per week. This means their employer, i.e. you, are liable for their tax and NI contributions. This can add more to the total employment cost than you might expect, because it is necessary to gross up their salary in order to apply these liabilities. So in the case of the net £400 per week example, the total cost to you, as the employer, is likely to be in the region of £560 per week.
- Second jobs can make nannies higher rate taxpayers
If, as is relatively common, your nanny also has another part time job, this will erode their personal allowance and potentially their basic rate band. If you have agreed a net salary arrangement with them, the increased tax this will generate on the salary you pay will be your liability, thereby increasing the cost to you.
- Use of the family car can constitute a benefit in kind
At the start of your nanny’s employment contract, a car may not feature in discussions, but as time progresses, you may agree that your nanny can use a family car for work related trips and personal use. Depending on the circumstances and level of personal use, HMRC may view this as a taxable benefit in the same way as they do when any employer provides a company car to their employees. However, the difference in this situation is that if you have agreed a net pay arrangement, then your employee, the nanny, won’t be responsible for the ensuing tax liability. The type of car provided, extent of use, contribution to upkeep and provision of fuel can all contribute to the total liability, which can be a significant extra charge.
- Other benefits can also contribute to the total tax liability
In order to do their jobs, nannies effectively become an extended member of the family and as such, will often have access to all the benefits associated with being part of the family – gym membership, private health cover, accommodation and family holidays. The question is, are these benefits essential for conducting the nanny’s work, or are they taxable benefits in the eyes of HMRC? For example, providing a nanny with a ‘granny flat’ to live in because it is more convenient and towards which no financial contribution is made, could be regarded as a further taxable benefit.
- Mistakes and misunderstandings can be backdated
The tax position in relation to the employment of nannies is complicated because a large part of the judgment hinges upon whether they are ‘part of the family’ – a relative or longstanding friend of the family and treated as such; or an employee, and given access to the various benefits in question as a reward for good service and because it enables them to perform their job better. If challenged by HMRC, parents will need evidence to argue the former if they are not to incur additional tax liabilities. If a benefit is questioned, HMRC may enquire into previous tax years in order to identify whether the benefit had existed previously and this may result in additional historical liabilities being calculated.
In essence, all these issues arise where a net weekly salary arrangement is agreed, and this is very useful to be aware of when you’re at the interview stage, and are perhaps in a position to negotiate a different arrangement.
If you would like tax advice on the most tax efficient options to plan for childcare, please contact Lesley Stalker by emailing las@rjp.co.uk