How to calculate tax for a Nanny?

Before answering how I can calculate tax for my nanny, nanny-housekeeper or housekeeper, it’s important to understand: Why Do I need to declare and pay Tax and NI deductions from my nanny’s wage on her behalf to the Government?

It’s never been so clear for families since the COVID-19 emergency that declaring your nanny’s tax and NI has made a great difference between those who have and who haven’t done so. It’s in national emergencies that citizens are able to ask for and receive help from the Government.

Those families that had this process already up to date with their nannies went through a smooth process of requesting help to furlough them since the lockdown situation made it impossible for some nannies to commute to their workplaces. As a result, some families were unable to pay their nanny’s salaries, given the scenario that some of them are owners of businesses that are currently closed or not working at 100% capacity. Very importantly, we cannot forget that it is mandatory for families to declare their nannies’ Taxes and NI.

Are you a Little Ones client?

If you have recently hired or are considering hiring a nanny, housekeeper or au pair through Little Ones, our monthly payroll service is completely free for 3 months from your nanny’s start date. Please call the Little Ones Nanny Payroll team for more information on 0207 183 6795.

What do I need to deduct from my nanny’s salary?

As an employer, you will need to deduct tax and National Insurance, but you may also deduct student loan repayments or pension contributions. Every employee (it doesn’t matter if they are working in a temporary capacity, permanent capacity, full-time or part-time capacity) needs to have PAYE and NI deducted from their Gross salary before receiving their salary (Net salary), since every person living and working in the United Kingdom is obligated to make financial contributions through Pay as Your Earn (PAYE) on any earnings above their personal allowance. What is PAYE?

According to the official United Kingdom Government website - https://www.gov.uk/:

“As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.”

The Employer is the person that is obligated to declare and send the PAYE and NI deductions to HMRC; they will deduce these amounts from the employer’s salary before they receive it, to after paying over to HMRC

What happens if I do not pay my nanny’s Tax?

In the United Kingdom, it is considered a criminal offence if someone doesn’t pay their PAYE and National Insurance or if they knowingly pay the incorrect amount, or if there is gross negligence in calculating the amount. If the family who is hiring the nanny get caught, as employer and employee, they may face one of the following penalties:

• They will need to repay the unpaid amount of PAYE and NI with interest,
• Fines for lack of payments and lack of right-to-information,
• The possibility of a Criminal investigation with the risk of prosecution and imprisonment.

It’s important to consider that the nanny, nanny-housekeeper or housekeeper (as an employee) is responsible for ensuring that their employers are in a PAYE scheme. The employee should keep their payslips every time they are sent to them and make sure that their payslips clearly show the amount of salary, PAYE and NI that the employer is paying to the HMRC on behalf of them, as well as any other deductions. We recommend that the nanny always ask their employers about this before the start of employment.

How I can calculate my nanny’s PAYE?

You will need to make these calculations based on how much your nanny earns. If your nanny earns less than £12,5000 per year, you can apply to be eligible for the personal allowance, so if your nanny earns less than the amount mentioned before, you’re able to apply for a tax-free each year on behalf of your nanny. The UK Government declared that for 2020-2021 tax-free is when you earn less than £12,500 per year.

If your employee is paid £120 or less, if they receive expenses and/or benefits, have another job or are getting a pension, you are not obligated to register for PAYE, but we advise that you keep payroll records of this.

Where your nanny earns more than £12,500 per year, you will need to deduct 20% from their salary. This will also depend on their basic salary rate.

Find below the PAYE tax rates and threshold for 2020-2021 what applies for all UK countries except Scotland:

What are the most common deductions that can be on your Nanny’s payslip?

1.PAYE income tax

As we have mentioned from the beginning, the first deduction that your nanny will find in their payslip is the PAYE income tax. Since most nannies earn £12,501- £50,000 per year, they will get a reduction of 20% (on the amounts paid above £12,500) of their salary before receiving it.

If you are hiring an Au Pair, they fall into the tax-free category, since they earn £7,800-£10,400 per year.

You will need to take into consideration that the payment also includes a company contribution of £100.

2.National Insurance

National Insurance is deducted each time that the nanny gets paid by their employer, but this will only apply to earnings over a certain amount: for 2020-2021, the UK Government has announced that the threshold is £9,500. Take into consideration that if your nanny gets deducted some pension contributions, and as this qualifies as income tax relief, you, as employer still need to make NI payments.

3.Pension Contributions

Pension contributions may include the employer’s pension scheme, as any voluntary contributions or those contributions that are passed to a personal pension provider. This deduction is taken out of your nanny’s pay at ‘source’ and doesn’t have tax on top of it. Little Ones always recommends that the families ask their nannies if they are interested in any pension scheme or that the nanny should ask their employer to deduct this from their payment.

Auto-Enrolment and Nannies

Due to an update of the Pensions Act, it is now a legal requirement for every UK employer to provide a workplace pension for their employees, automatically enrol their workers into that qualifying pension scheme, and contribute to that pension. Whilst you may not consider yourself to be an ‘employer’, this Act does include those that hire nannies for their families. Little Ones London is here to support you through this update and ensure that the process of enrolling your nanny is simple and straightforward. Would you like to know if your nanny needs auto-enrolment into a pension scheme? Click here