Net pay versus Gross

PAYE for Nannies always recommends that nanny employers ensure that a nanny's employment contract defines the gross wage a nanny will be paid, even if this is based on a notional "Net" wage.

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.

Unfortunately, agreeing a net figure for a wage almost always results in disadvantages for the nanny and often presents difficulties for an employer.

If a nanny is paid a gross wage, any period of reduced earnings, for example because of a prolonged period of sickness, will often result in less tax being paid once earnings are back to normal. This would give the nanny a one-off increase in net pay. If a net wage is agreed, the nanny would gain no benefit from this as the employer would simply have to pay less tax for that particular earnings period. Similarly, a nanny on a net wage sees no benefit from the Chancellor's annual increase in tax allowances as the reduction in tax simply reduces costs to the employer.

From the employer's point of view, agreeing a net wage means the employer's overall costs can increase dramatically if the nanny subsequently takes another part time job or if the Chancellor increases National Insurance contributions as happened a couple of years ago. Agreeing a gross wage will therefore reduce the employer's exposure to unforeseen financial liabilities.

PAYE for Nannies recommends that any net wage negotiated at interview is converted to its equivalent gross wage, assuming a nanny tax code giving the standard personal allowance (PAYE for Nannies can provide clients with this figure) and the nanny's agreement gained to use this equivalent gross figure as the basis for pay stated in the contract of employment. However, if a gross wage is used in the contract, the employer MUST ensure that the nanny understands the implications of this and must also ensure that all future discussions with the nanny only relate to gross pay because the equivalence between net and gross pay will be lost as soon as any change occurs.