The ultimate guide to
Net vs Gross
What is this ‘Go Gross’ thing really all about?
We called this the ultimate guide to Net vs Gross for a reason! Here we’ll discuss the differences between a net and a gross salary, the history of 'take home pay' and most importantly why both employers and nannies will benefit from 'going gross'.
What is the difference between Gross and Net pay?
Gross is the amount an employer pays their employee before any deductions are made. Many people will be familiar with the concept of gross pay as it’s how most industries will discuss a job salary. Net is the amount the employee actually receives each payday after deductions – it is often referred to as ‘take home pay’.
Gross – before deductions (imagine gross is the larger figure of the two)
Net – after deductions (imagine this is what you actually catch in your net to keep and take home)
What deductions are made from a Gross salary?
So now that’s cleared up - what do we mean by deductions? We all know about having to pay tax but there’s other less obvious factors that impact a gross salary. We’ve listed all of these out below.
- Income tax
- Employee’s National Insurance Contributions (NICs)
- Employee’s pension contributions (if they are eligible – read criteria here)
- Student loan repayments (if applicable)
- Court order or child maintenance payments (if applicable)
The history of Net vs Gross
Gone are the days when nannies could be paid cash in hand. Parents who hire a nanny are now classed as employers and must comply with HMRC law which includes declaring tax and making the other necessary deductions that make up a gross salary. This has been an extremely positive movement for the nannying occupation as it means nannies are eligible for the same rights and entitlements as every other employee in the country such as National Minimum Wage, Holiday Allowance, Sick Pay and Maternity Leave.
However, the idea of ‘cash in hand’ still somewhat lingers, as many nannies continue to request their ‘take home pay’ - often leading to the employer agreeing a net salary. This is where it gets tricky. Unfortunately, many employers and nannies are unaware of the negative implications contracting a net salary will have and that it’s extremely detrimental to both the employer and the nanny. Why? To make things easier, we’ve split out the reasons:
Why is it better for employers to agree a Gross salary?
1. Budgeting costs
Agreeing a gross salary allows employers to budget more effectively. To demonstrate this, let’s say a nanny qualifies for a pension – the employer needs to consider the costs of tax, NI and pension contributions on top of the nanny’s ‘take home’/net pay. So by agreeing a gross salary to incorporate these from the outset, the employer immediately has a better idea of how much the nanny will cost. If an employer agrees a net salary, they’re committing to paying all of the nanny’s deductions that make up the gross, regardless of tax code or tax history. It’s essentially like signing a blank cheque.
2. Net = Employer is liable
If the nanny is on a net salary, the employer becomes liable for any of the nanny’s unpaid tax from previous jobs, court-order or child maintenance payments and even a student loan. If a net has already been agreed and any of these circumstances later come to light, it is the employer who will be legally responsible for them.
3. Pension Contributions
As of April 2019, if the nanny is eligible, the employer pays 3% and the nanny 4% towards pension contributions. Employers who have contracted their nanny’s salary in net terms will have to pay both sides of the pension contributions. When a gross salary is agreed, the employer will only pay for their (3%) side of the contributions.
4. Complying with HMRC
HMRC will only talk in gross terms and so contracting a net salary may cause problems when operating a PAYE scheme and declaring the correct tax. Added stress and hassle that no one needs when tax law is already complex!
Why is it better for nannies to agree a Gross salary?
1. Job stability
If the employer has agreed a net salary without budgeting in tax, NI and pension contributions, they may later realise that they can’t afford the nanny. There may also be hostility in the working relationship if the employer is also paying what they have been made liable for such as the nanny’s unpaid tax and student loan. All of this puts the nanny’s job at risk whilst the employer must rethink their childcare options.
2. Tax-free Allowance
Nannies on a gross salary will benefit from tax-free allowance which usually increases each April. As of April 2019 this is £12,500 (see rates on .gov here). With a net wage agreement, it is the employer who will see the tax saving and they will receive any tax refunds that the nanny may be due.
3. Easy Comparison
Almost all industries talk in gross terms and so ‘going gross’ will enable nannies to compare salaries more easily. Having a set standard across the board enables us to assess job specifications clearly and quickly. Taking steps towards creating a nannying industry that only talks in gross terms will allow nannies to assess their earning power and consider their career options.
4. Banks + loans
When applying for a mortgage or loan, the lender will ask for evidence of the nanny’s income or payslips. A nanny on a net salary may find themselves in a predicament as the lender will want to see the gross income, not net.
How can I convert a Net into a Gross?
You can use our Online Calculator to convert a net salary into a gross salary. If you wish to know what the nanny’s take home pay will be from a gross salary, you can select gross to net to calculate this as well. Please bear in mind that our calculator assumes that the nanny is on a standard tax code.
If the nanny is not on a standard tax code or you’re not sure of their tax position, we’re here to help – one of our friendly team members will be happy to discuss how Nannytax supports nannies and their employers with the complexities of tax, HMRC law and more.
All Nannytax clients have unlimited access to our team of payroll experts who can do more specific/ complex calculations based on individual circumstances such as the employee’s tax code or if they have variable working hours.
#GoGross to benefit both nannies and employers!
The #GoGross Campaign aims to shine a light on the benefits of going gross as we continue our mission to raise the payroll standards for nannies across the UK. Nannies shouldn’t be forgotten about when it comes to tax, employee rights and more.