Net nannies lose out
Usually it is the employer who ends up paying much more than expected by agreeing a net wage with their nanny, but there are occasions when nannies also risk losing out by having a net wage agreement. The 2008 changes to the personal tax-free allowance provides a perfect example.
In September 2008 the government announced changes to the tax system to compensate those who lost out the most from the removal of the 10% tax band in April's budget. These changes meant that the personal tax-free allowance increased from £5,435 to £6,035, resulting in a £120 rebate for most tax payers. Not everyone was fully compensated, since those on the lowest incomes lost as much as £230 per year from the abolition of the 10% tax band and yet only gained £120 from the introduction of the new higher allowances. Those who benefited the most are those earning between £13,335 and around £40,000. They gained once from the reduction in the basic rate from 22% to 20% and again from the extra £120.
Only nannies on a gross wage automatically benefit when the personal tax-free allowance increases.This government u-turn presents an interesting example of how nannies on net-wage agreements sometimes stand to lose out, since, from a legal point of view, the £120 rebate does not need to be passed on to the nanny unless she is on a gross-wage agreement.
It could of course be argued that nannies on net-wage agreements didn't lose out when the 10% tax band was removed in the first place, since it was the employer who took the hit for that. But nannies on a net salary who have only been employed since the beginning of this tax year may not see any of the £120 rebate as this is at the discretion of the employer. Also there is a possibility that nannies who have been employed for longer may have had to forsake a potential payrise as many employers found themselves having to tighten their belts following the removal of the 10% tax band.
But whether there are benefits or drawbacks, the best thing to do is to agree a gross salary with your nanny. After all - that's what employers in all other professions do.