Net pay versus Gross

Historically, dating from the days when most nannies were classed as domestic servants within large households, nannies have been paid a net wage with the employer paying all income tax, employee's and employer's National Insurance contributions on top of the agreed wage. This practice has remained the norm in England (although not in Scotland, where normally a gross wage is agreed) and is often reinforced by what the nanny hears from her peers during her training.

PAYE for Nannies in general recommends that nanny employers pay the nanny on a gross basis. However, our recommendation has changed recently as the situation is not as black and white as it used to be in previous years. Recent announcements from the new government will have a significant financial impact over the next few years and we now recommend you discuss your individual circumstances with us prior to finalising anything with the nanny. In many circumstances, a net pay agreement may be of significant financial advantage to the employer.

Employers should NOT under any circumstances agree a net figure with the nanny and then say something to the effect "but we will put the gross equivalent in the contract". If a gross figure is put in the contract then both the employer and the nanny need to realise that this is an estimate based on average pay and a "normal" tax allowance and tax history. Basing calculations on a gross figure will frequently result in a net figure which is very significantly different from the net figure agreed initially (sometimes by more than a hundred pounds). This happens most often in the first or final months of employment but will also happen if the nanny has been off sick, had unpaid leave or worked overtime. Sometimes the net figure will be more than the nanny or employer is expecting but often it will be less.

If an employer decides to put a gross figure in the contract following initial discussions which have been in net terms they MUST fully explain the differences to the nanny and warn her that future net pay may vary. All future discussions must then be in gross terms and net pay rates should not be mentioned again by either party.

Employers should note that following recent government announcements on the phasing in of a £10,000 tax free band, the tax charge on most employees will reduce substantially over the next few years. Employers who employ on a net basis will therefore see their costs reduce significantly as they will pay less tax on their employees behalf. Conversely, employers who have opted to pay on a gross basis will see no reduction in their cost at all, but the employee's net pay will rise because less tax will be charged on their gross pay. Employers who employ on a net basis will see a small increase in cost because of the planned 1% rise in employee NI contributions in April 2011. However, this will be minor (less than £18 per month for a nanny earning £1500 gross per month) compared to the benefit gained by the employer from the reduced tax charge (up to £80 per month over the next four years).

Caution needs to be exercised by the employer when agreeing net pay if the nanny either has, or expects to get, a second job. In these cases, any net pay agreement should be accompanied by an agreement with the nanny to allocate a fair share of the nanny's tax allowances to the employer. Please note that in these circumstances (whether the nanny is paid on a net or gross basis) a greater proportion of tax will be payable on any net or gross pay figure compared to the tax payable if this was the nanny's only employment.

In such cases the employer should NOT contract to pay a gross amount based on an agreed net figure that has been grossed up using a shared (reduced) tax allowance. In such cases the employer would be locking themselves in to a higher gross figure which would still need to be paid even if the employee left the other job and the other part of the tax allowance was transferred back to the remaining employer's PAYE scheme.