Nanny Tax Codes
For Nanny Share
Options
Today many parents offer part time nanny jobs. This generally means that many nannies also have another job on the days
that they do not work for you. In the world of gross salaries this
creates no issues with their tax code or other employers. In "nanny
land" where nannies still tend to agree a NET salary this carries it's
own set of complications.
From 6th
April 2009
in the UK an individual has a personal tax code of 647L. This code means
that they receive £6470 tax free this year via PAYE. After the tax free
allowance, all income is taxed at 20% (Basic Rate - BR)
If the employee joins you without a P45
(as she is not leaving her other employment) A P46 will have to be
processed that would ask if she has other employment. This being the
case would mean that her starting tax code in your employment would be
BR (Basic Rate of 20%)
In a
second job, the income tax starts at the 20% band leaving out the tax
free allowance. For a second employer paying a net
salary (i.e. the employer picks up the additional tax liability) this
will mean that one family will pay a disproportionately higher tax
liability than the other employer
You have
3 dilemmas to consider, firstly do both employers register individually
with HMRC (If the nanny already has another job, then this is the
correct method) Secondly do you pursue the tax code split option. If the
nanny is already employed with an agreed net salary, then this is
generally the preferred option, but requires HMRC to make the necessary
arrangements. Thirdly you can agree a gross salary, which is in HMRC's
view the correct method.
Nanny Share
& Joint Employers
Registering with HMRC as One Joint Employer
In
situations where a nanny share occurs for 2 families concurrently then
this can be treated as one employment and is the most straight
forward but not necessarily most cost effective arrangement. All the
costs are calculated proportionally against the time used by each
family. One family will register with HMRC with
one PAYE scheme. It is therefore important for the families to draw up a service
agreement between both parties, outlying their share of the costs.
Registering
with HMRC as Individual
Employers
When
there is no shared time the nanny share must be treated as two separate
employments. From the
employee's perspective this would also mean (subject to criteria) that
they would be entitled to 2 sets of SSP or SMP.
Nanny Share
Tax Code Split -
Only HMRC can split the tax code
To split the tax (code) allowances the nanny must
send a letter to the tax office in question signed by the nanny and
both employer's applying for the allowances to be split,
proportionally against each gross salary in each employment.
It can
take several weeks to arrange a tax code split, and we even know of
circumstances when the local tax office has refused to split the
code. Tax code splits are not allowed to be applied retrospectively and
some tax offices may also cancel a previously agreed split at the start
of each new tax
year.
Nanny Tax
Calculation Examples: (For Illustrative purposes only)
Scenario
1- Joint Employers - £300 Net per week salary agreed
£381.01 Gross per week 647L W1 tax code = £300 NPW.
Employers NI
in addition to gross salary is £34.69 per week. Total cost as an
employer is £415.70 per week. Equates to £207.85 total cost per employer
or divide this figure by the proportional use of each employer.
Scenario 2 - Individual
Employers - £300
Net per week salary agreed
(£150 each per week agreed by each employer)
Employer 1 (using full tax code 647L) £163.71 Gross per week = £150 NPW.
Employers NI in addition to gross salary is £6.87 per week. Total cost
employer 1 is £170.58 per week.
Employer 2 (using BR tax code) £199.66 Gross per week = £150 NPW.
Employers NI in addition to gross salary is £11.48 per week. Total cost
employer 2 is £211.14 per week.
Using this method the second employer will
pay a disproportional amount of tax compared to employer one, unless a
proportional tax code split is advised from HMRC.
Scenario 3 - Individual
Employers - Converting the
total combined NET salary of £300 Net per week to an agreed
£181.68 gross per week salary
by each employer
Employer 1 (using full tax code 647L) £181.68 Gross per week = £162.40 NPW.
Employers NI in addition to gross salary is £9.17 per week. Total cost
employer 1 is £190.85 per week.
Employer 2 (using BR tax code) £181.68 Gross per week = £137.60 NPW.
Employers NI in addition to gross salary is £9.17 per week. Total cost
employer 2 is £190.85 per week.
Using this method, it leaves out the need
for requesting a tax code split from HMRC and both employers have the
same total cost, and the nanny still has a joint NET amount of £300 per
week. You will also note that the overall costs are less than being
joint employers. This is because each employer will benefit from the NI
threshold of £110 per week, where as with the joint employment the £110
threshold has been apportioned at 50/50
Now the question you are asking is how did we
get to the gross salary above. Well of course that is what our service
provision includes, being able to calculate in reverse this type of net
salary agreement. When you are therefore in the position to know the
proportional allocation of salary, we will be able to make these
calculations for you. If a tax code split is agreed by HMRC then the
procedure would be the same as in scenario two, using the advised split code
on an individual basis.
