Is it better to agree a GROSS pay or a NET pay?

When you take on a nanny, one of the most important items to agree is on is the rate of pay for the job.  You may be used to talking about gross pay or salary, but nannies tend to talk in terms of net pay.  There is a big difference; Gross Pay is the amount before deductions, and Net Pay is the amount the employee actually receives. 

A Net Agreement

In most cases the nanny asks for a fixed net pay and the employer agrees to this.  The employer agrees to pay over the tax and national insurance due in addition to the agreed net pay.  The agreement becomes part of the employment contract. 

For example, if you agree a net pay of £300, the calculation will look like this:             

Gross pay                  £381.01
 less tax                          51.20
 less NI                            29.81
 = Net pay                     300.00  (as agreed in the contract)

 In this example there is also Employer’s NI due of £36.16.

So, the employer’s weekly costs will be: 

Net wages                  £300.00
HMRC                           115.70
Total weekly cost         415.70

Many agreements are based on net pay and if this is the route you choose we can make all the necessary calculations for you.  However, you should be aware that this type of agreement can be fraught with difficulties.  If you agree a net, you are agreeing to pay over the deductions whatever they might be, so any variation in tax due will affect your costs, not your nanny’s.  This is not fair on either of you!  Here are some common examples of situations where one of the parties is unfairly disadvantaged by the net agreement:

  • A nanny has another job (or self-employed income) and her tax code is to remain with her other employer.  Suddenly Basic Rate tax is payable and the second employer’s costs increase dramatically.

  • A nanny has a gap between employments, so her earnings for the tax year are low enough to mean that she should benefit from tax rebates, or at least not have to pay tax for a while.  Under a net agreement, the employer gets the benefit, not the employee.

  • A nanny has two jobs and agrees a net with both, so does not notice that both employers are using her full tax code.  A huge underpayment of tax arises, and the nanny has to repay it to HMRC the following year. 

  • A nanny has been overpaid tax credits and HMRC decide to recover the overpayment through her tax code.  The employer ends up paying these too.

 A Gross Agreement

The reason the net agreement is so fraught with difficulties is because the PAYE system is not designed with net pay agreements in mind.  Almost all other professions agree a gross wage or salary, then the tax code determines the tax payable and the resultant net pay.

This means that an employee’s net pay varies in accordance with their individual tax circumstances, which is the basic premise behind the entire PAYE system.

Advantages of paying gross for the employer

  • If you agree a gross pay, your costs are fixed at the outset.  You will not be hit with unexpected HMRC bills when / if your nanny’s tax circumstances change.

  • Your nanny’s pay could become subject to other deductions which you may not want to pay on her behalf, e.g. a Student Loan or a Court Order.  If you have agreed a gross pay at the outset, you can reduce the nanny’s net pay by the amount due without having to alter the employment contract.

Advantages of paying gross for the nanny

  •  You receive any tax refunds (not your employer)

  • You benefit from a higher net pay if you are due less tax, e.g. due to a period with less or no income

  • You know who is using your tax code, because it is reflected in your net pay

  • You see the effect of changes in taxation rates as announced by the Chancellor each year.  In recent years that has meant extra money for most employees (although not in April 2011!)

  • You could find it easier to apply for a mortgage 

Deciding on how much to pay

If you decide to agree a Gross pay rate, but your nanny is asking for a Net amount, you will need to know how much to offer.  We can help you by working out an ‘Equivalent Gross Pay’, based on the current tax and NI rates, the nanny’s current status as a taxpayer and her expected net pay.   

Note that once the gross agreement is in place, all related calculations are also gross, e.g. holiday pay and overtime.  The original ‘expected net’ is only used in the initial calculation to arrive at the equivalent gross.  Thereafter the gross rate applies to all calculations.

Top Tips for avoiding a net pay agreement

  • Don’t use net pay rates at all.  Say ‘You will receive £9.00 per hour less tax and NI’.  
  • If you have to use net pay rates, use words such as ‘we will calculate a gross pay rate for you based on £7.00 net, assuming we have all your tax code / half your tax code / 2/5ths of your tax code’ (or whatever proportion seems fair given the circumstances).
  • Either urge the nanny to contact NannyMatters direct to find out what she will receive in her hand or get us to produce an illustration instead.
  • Give the nanny one of our helpsheets so she understands why you are insisting on a gross rate and why gross pay agreements are better all round.  This is not about short-changing the nanny!  If we get the rate right, she will not be any worse off in the short-term and and she may end up better off under a gross pay agreement in the long-term.