An example: a net wage agreement can be costly
By agreeing a net wage with your nanny you are effectively agreeing to pay all her taxes, irrespective of her tax code or tax position.
Nannying is one of the last professions left in the UK where wages are still commonly agreed on the basis of net (i.e. take-home) pay. It is surprising that despite the growing professionalism of nannies net pay arrangements are still so common. Especially when you bear in mind the financial implications at stake, both for the employer and the nanny.
The difference between a net and a gross wage can be as much as 40%. Nannytax has been advising parents to discuss and agree salaries in gross terms for many years, yet we frequently receive calls from potential employers who are unaware of the real cost involved with employing a nanny. Once they find out that the difference can be as much as 40% many realise they can't afford to employ her at all, or they decide to only declare part of her salary in an attempt to save money, which not only is illegal but also has real-life implications for the nanny.
By agreeing a net wage with your nanny you are effectively agreeing to pay all her taxes, whatever these may be. In other words a nanny on a net wage agreement will always take home the same amount no matter what her particular tax code is or whether she has unpaid tax from a previous place of work. This may be good for the nanny; however, for you it could prove to be a costly decision.
Consider the following:
If you agree a net salary of £300 per week the nanny's gross salary would be approximately £361*, but in addition to nanny's tax and NI you must also pay employer's NI contribution, which in this instance would be approximately £29, bringing the total cost to £390. The difference between the agreed net pay and the real, total cost is 30%. For many employers that is too much, and they may realise they can't afford to keep the nanny.
If the nanny is not on a standard tax code or there is unpaid or underpaid tax from previous employment, it could become even more expensive. Read more about the pitfalls of agreeing a net wage from an employer's point of view.
*tax year 2013/2014