November 2000
Caught in the net
Agreeing wages on a net pay basis leads to unhappy consequences. Nannytax explains why
Nannying is probably the UK’s only profession where wages are commonly agreed on the basis of net (take-home) pay. In virtually all other types of work a new employee is offered a gross wage. Why is nanny employment treated differently, and what are the consequences of this out-of-date convention? To answer this we have to first look at what some of its consequences are for both nanny and employer.
There is some confusion that net and gross pay are actually two different options for employers. This is not the case. Under UK employment law everyone is paid a gross wage from which statutory deductions income tax and an Employee’s National Insurance Contribution (NIC) – are made to arrive at a net wage. An Employer’s National Insurance Contribution is also paid for each employee. This means that with a net wage an employer is guaranteeing you a fixed rate of take-home pay which they “gross-up” by adding tax and your NIC to arrive at a wage.
Calculating tax from net pay - don't!
This is where the first problem arises in getting your pay calculations right. Because the PAYE tax system is based on a gross wage, all the tax and NIC calculation tables your employer will receive from the Inland Revenue, if they sort out your tax themselves, start from a gross pay figure. With three different tax bands applying to most nannies’ wages, it is virtually impossible to operate these tables back-to-front. And if you are repaying a student loan through your payroll, calculations start from a gross wage.
By agreeing a net wage your employer is writing you a blank cheque
The amount of tax and NIC deductions an employer has to make on your behalf are not fixed but can vary considerably for a number of reasons. Here are a few of them. You may have an unusual tax code which requires your employer to deduct more or less tax than the current average from your wage, for example if the Inland Revenue is clawing back some previously unpaid tax from an earlier job. Or you may have two part-time jobs and your other employer may already be using up your tax-free pay (the first £84 a week you receive) in their wage calculations. In this case your second employer should be paying tax on every penny you earn, as your weekly tax-free allowance cannot be claimed twice. By agreeing a fixed net wage your employer is agreeing to gross up your wage irrespective of by how much, and in some cases this may be by far more than they anticipated.
A net pay deal could undermine your working relationship
It may sound like a perfect arrangement to have your employer paying any amount of your tax, but it can end up poisoning your relationship. A first-time employer will be unaware of any consequences or hidden costs of agreeing a net wage. If they use a nanny agency and both you and the agency discuss salaries in net terms, they will just assume this is how things are done. Your employer later ends up feeling misinformed or cheated – not exactly the basis for that all-important confidence and goodwill.
A net pay deal disguises the true cost of your employment
Even if your tax code is standard, agreeing a fixed net wage gives your employer little idea of the true cost of employing you. For example, a nanny earning £200 net a week actually costs their employer £271 a week while a nanny earning £300 net a week actually costs their employer £436 a week. That is a big difference which the net wage habit disguises. It also leaves you unaware of what your real, gross pay is. A worst-case scenario for an employer discovering the true cost of what they have agreed to could be either a decision not to employ you after all, or at least an embarrassed request to renegotiate a salary already agreed.
You are also the loser
It is not just your employer who can lose out from the net pay habit. If the Government decides to cut the basic rate of income tax, as they did this year from 23 per cent to 22 per cent, and in previous years from 25 to 23 per cent, or to increase your tax-free personal allowance, which they do nearly every year, and if you have agreed a fixed net wage with your employer they will not have to pass a penny of these tax cuts on to you! Only employees on a gross wage will automatically receive the benefit of cuts through paying less tax and NIC.
Why are net pay deals still the norm?
Net pay arrangements may be a leftover from a different age, when nannies lived as part of a household of domestic staff who were looked after in a different, more paternalistic way by their employer while the taxman turned a blind eye. But nowadays a nanny is typically a young independent professional, more often live-out than live-in, paying her own way and more aware of her rights as an employee and a citizen than a dependant. By the same token, the modern tax system no longer turns a blind eye to domestic employment as it may have done.
But old habits die hard, and once nannies, parents and agencies alike have become used to comparing wage rates on a net basis, it is hard to change. Yet even here the justification breaks down. Many nannies go on to work in other fields of employment as they get older and so will have to compare their nanny wage with pay in other fields, on a gross wage basis. Also, parents will want to be able to com pare what they are expected to pay a nanny not only with other types of employment but indeed with their own wages! And they will probably want to know what their nanny is actually going to cost them, not just how much she will take home.
SO HOW CAN THE NET PAY HABIT BE CHANGED?
What can nanny agencies do?
At the start of every new tax year, Nannytax sends out a laminated chart to several hundred nanny agencies in the UK which shows all levels of net weekly and monthly pay and their gross and total cost (including Employer's NIC) equivalents for a nanny with a standard tax code. This puts the agencies in a position to quote the real cost of employment to clients and to explain it to their nannies. We also provide agencies with advice sheets for parents. Agencies can also address these issues in their own literature and on their websites.
What should employers do?
Nannytax advises parents to establish the true cost of employing a nanny before agreeing a wage and, even if they do, we advise them to put the current gross equivalent into their nanny's contract of employment rather than the net wage. We stress that tax and employment laws, such as the National Minimum Wage which is based on a gross wage, governing their employment of a nanny are exactly the same as in all other types of employment.
What can nannies do?
The short answer is to grab the bull by the horns and insist upon a gross wage. It will avoid any bad feeling on this issue arising between you and your employer, reinforce your status as a professional in your career, and ensure you get the benefit of any future Government tax cuts in your take-home pay.