What is the difference between gross and net salary?
Nannying is one of the very few professions where salaries are still sometimes agreed in net. This is not advisable for a number of reasons but very often people do not understand the implications of a gross or net salary. In this blog we answer some crucial questions to clarify the issue and explain why salaries should always be agreed in gross.
Summary of the difference between gross and net salary?
Gross salary is take-home pay + employee’s national insurance + tax.
Net salary is the take-home pay that is left after tax and employee’s national insurance are deducted.
How do you know what your actual costs will be as an employer?
As with so many things in life, there is almost no limit to the things you can pay for as an employer. Some examples include outsourcing recruitment, payroll and legal support (ie for a contract), paying for your nanny to be registered with Ofsted (so that you can claim tax credits) and benefits in kind (such as providing your nanny with a car).
However the mandatory expenses are:
- Gross pay (incorporating tax and national insurance payable to HMRC)
- Employer’s national insurance (which is also payable to HMRC)
- Employers liability insurance (a legal requirement)
You can work out the gross pay + employer’s national insurance using the Nannytax calculator although this is dependent on the nanny being on a standard tax code.
If your employee is not on a standard tax code, or you do not know what their tax position is, you should engage a payroll company to calculate your tax and national insurance costs or find out from HMRC direct.
Employers Liability Insurance can be purchased from Nannytax for £99 per year (Inclusive of Insurance Premium Tax (IPT) or can sometimes be included as an add-on to home insurance.
How do you know what your nanny’s take-home pay will be?
The Nannytax calculator will give you the net salary if you enter a gross salary. Again, this assumes a standard tax code. Otherwise, when the nanny is paid, the information will be on her payslip.
Why is it better to agree a gross salary?
HMRC only works with gross salaries, so even if you agree a net pay with your nanny you will have to engage with HMRC in terms of gross pay.
Moreover, a gross salary allows the employer to control their costs. It incorporates tax no matter how much this might be. If an employer commits to a net salary they are writing a blank cheque for tax and if their employee has unpaid tax from the past, or a student loan, or for any number of reasons has a non-standard tax code, then hiring a nanny could end up much more expensive than anticipated.
If a net salary is agreed it could easily turn out to be too expensive and the nanny could find herself out of a job, while the employer has to re-think their childcare options.
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Enable Limited is an Appointed Representative of Fish Administration Limited and authorised by them to sell liability insurance for nannies and their employers. Fish are authorised and regulated by the Financial Conduct Authority. Firm Reference Number is 310172. Fish Administration Limited is registered in England and Wales. Company Registration Number 4214119. Registered Office: Rossington’s Business Park, West Carr Road, Retford, Nottinghamshire, DN22 7SW.