Can someone help me understand the cost of nannies post the pension

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What are the options for parents who have nannies full time ..

The cost of a full time nanny can be c.£30k+/- gross - And this is before the parent has to pay their own tax and NI on their own salary!

Now if I understand correctly parents will also have to contribute up to 3% pension. That is c.£1k extra p.a. Is it deductible?

Are there any rebates or other mechanism to reduce the overall cost? In many other European countries childcare is partly deductible , however parents in the UK do not have the ability to deduct any of the cost and are now faced with yet another expense.

I would be grateful if someone could explain to me what will be the impact of the new pension and whether there are any means of reducing the overall childcare cost.

Deductible from what?

As I understand it, it works similar to National Insurance where you have one part from the employee and one part from the employer.

The nanny has their pension contribution deducted from their gross salary.
The employer pays the employers contribution.

There is the tax-free childcare scheme which starts later this year and is up to £2000 per child. That works as you pay into an account £8000, Government tops up by £2000.

If you had 3 children who all qualified for the scheme then in theory you could pay in £24,000 and have £6000 added by Government.
That entire £30,000 has to be used to pay for the nannies Gross salary.

Full scheme details still not available, so it is not yet clear how it will work with nannies as it seems setup currently for situations where there is an amount paid for childcare on a per child basis.
It is also being phased in, so whilst under 5's should qualify from the start, older children will not. It is also only up to the September following the child's 11th Birthday, so not great if you have a summer born child.

Thanks for your reply.

I currently pay (i) my nanny her net salary and (ii) to the HMRC my nanny's tax , her NI and my NI as employer.

In respect of the new pension payment requirement, will I end up paying (i) my nanny's net salary (unchanged), (ii) 3% pension to some pension scheme (do I need to set it up myself?) and (iii) tax/ NI to the HMRC - however the amount of tax I pay for her should reduce to reflect my contribution to her pension? All in, will i end up neutral or worse of?

My question re deductible was related to the fact that I currently pay my tax and my NI on my own salary and wondered if any of the payments I make in respect of my nanny could be deductible on the tax I pay on my salary.

Just saw your second post. THanks very much!

Thanks again Cindy34, my children are both under 11 so not sure when/if it will apply. But thank you as i was not aware of this scheme. I am sure that, if successfully implemented, it will help families some cut the cost . At this present stage I am debating the logic in keeping a nanny given the current cost and the increased complexity, this despite the fact i do not want to change my nanny as she is great.

Are you currently on a net pay agreement? If so then that needs to be changed at some point as any deductions from salary, including things like student loan repayments, would be your responsibility rather than your nannies.

I think that with a Gross pay agreement, it would be as Cindy says - you deduct things from the nannies Gross salary and pay employers things on top.

Physically you would be the one doing the paying, so you would transfer the nannies pension contribution and your own employers contribution to the pension scheme provider. NEST is a provider any small employer can use but as with all pension schemes there are management charges, though with NEST it seems the nanny would be 'paying' the management charges (as they are taken from the pension pot).

Good question about what the affect on taxes paid would be - as it is all based from the Gross salary, I don't think it will affect the amount of employee or employer taxes.
All in you end up worse as there is the employer contribution to the pension which has to come from your pocket.

Some useful links:
PensionsRegulator - Employer Contribution percentages
NEST Pensions
Tax-Free Childcare Concultation documents
Tax-Free Childcare - Better/Worse than Childcare Vouchers?

Thank you very much for all the very useful explanations and links. I very much appreciate it.

I really wonder if those putting in place these measures fully considering the administrative impact on parents, who are not set up as corporations with HR divisions, and the extra cost over a cost which is already exorbitant given no tax deductions are allowed.

As mentioned above this is pushing me to consider alternative options like getting an au pair , which is somewhat absurd as my nanny is doing a great job.

Which begs the question - is an AuPair entitled to a pension? I think they will be exempt because they earn less than the personal tax allowance (currently £10,000 - £10,600 from April 2015).

Other small employers are affected as well, such as small retailers. Did Government consider the administrative burden, who knows. Maybe and maybe that is why NEST was created, so that employers could choose to offer that as their pension scheme.

Anyone who earns over the threshold is affected, so those au pairs on £200/week would be.

I think the TFC pot will also be able to be used for employer NI and pension contribution - it's supposed to be more like WTC which is the whole cost of the nanny. I don't know if it will extend to payroll though.

The auto-enrollment assumes you will use NEST. It's logistically the simplest option. However other schemes may have a better deal for you financially...

I think TFC (tax free childcare) pot will be like existing childcare vouchers, only payable to registered childcare providers. It would be great if they have included paying HMRC and pension providers but I doubt they have thought about that. Time will tell.

They were advertising this on the radio this morning and it's really set the wind up me.
As I understand it, I'll have to fund an additional 3% on top of the gross salary I already pay. However the nanny will also have to contribute 5% from her gross salary - now I'm unclear whether that comes out of the tax that I already pay that is part of the gross, or if she has to fund it out of her net? ie if it makes no difference to her or if she's also going to want a further 5% payrise so she maintains her current take home?
I fear it's going to have the completely undesired effect of making a lot of nannies redundant as the extra cost and admin just tips affordability over the edge for a lot of people.

Sorry to be asking this daft question (I looked around but couldn't find a straight answer), but when is this pension applicable from? is it from this year or by 2017?
thanks

you have to tap in your PAYE code and it tells you. I just need to find the PAYE code now...

Have just been looking at this as I am having difficulty getting through the Pensions Regulator website.. (but thats probably a whole different thread).
Our nanny is 57 and having mentionned this to her, she is aghast. She says she already has two pensions and setting up another one for her next year is going to make pretty much no difference to her at all. She doesnt want to pay 5% of her current salary into another pension at this point of her working life.

Is there any way of opting out of it?

Nanny funds the employee contribution out of her net salary if she wants to take part.

Look at pension regulator website - you should be given a 'staging date' - you can find it there if you have your PAYE ref no.
This is the date from which you have to autoenrol any member of staff that earns more than the minimum limit...which is currently £10k (reviewed every April) but is calculated from what they earn in the period they normally are paid - so eg if they are paid monthly and normally earn less but then one month earn more than (currently) £833 you can postpone for 3 months but as I understand it only once ...then they would have to be auto enroled...pay into a pension pot...even if over the year they don't earn more than £10k.
Also if they earn between about £481 - £833 a month they can opt in - and if they do you both have to pay the described levels of contribution...so up to Oct 2017 - it is 1% each, then it goes up to 3% employee and 2% employer and then from Oct 2018 it becomes the 3% employer, 5% employee.
All employees can also Opt out - so the 57 year old nanny can opt out...you aren't allowed to encourage anyone to though! And if they earn over the £10kish you have to autoenrol them and deduct pension from their pay and then they opt out asap and hopefully get their contribution back - and you will have to re-autoenrol them every 3 yrs for them to Opt out....
I phoned them (pension regulator) and they were really helpful - but still a bloody nightmare for a small employer...(especially one who pays their staff different amounts depending on hours worked )...huge amounts of red tape -and also means that staff will end up with less in their pockets as the 3% the employer pays has to come form somewhere and no doubt will be taken into account when calculating pay increases etc - then the staff will have to find their contribution too...
NEST are the pension provider regulated by the DWP, so probably the choice of small businesses -but they are a private company - the chief exec and another senior manager made £800k between them last year...
I don't understand why they couldn't have done something with NI and made it easier for everyone....

TranmereRover - I think you are right that the employees current Gross salary can not be lowered to pay for the employer contribution. However it may mean that you don't give nanny a payrise for several years.

The employees contribution comes out of the nannies salary, I think from the Gross salary. So they don't pay income tax on that amount. For NI calculation purposes I think the Gross salary figure before any deductions is used, rather than the figure after deductions.
If they have a personal pension without employer contribution, then the pension comes from the Net salary and Gov adds in the tax that had been deducted. So think that makes sense.

There is a right for employees to opt-out. However they would then not get the employer contribution, so those with existing pension plans may be better to cease/reduce payments into their current plan - though I do wonder how plan charges will affect things... such as is it better to have multiple pension plans or all in one pot?

We also need to remember that pension providers can have trouble - remember Equitable Life?

Okay I'd better call them tomorrow as I don't have a PAYE number as I'm technically not an employer yet, will be in May though. I didn't take that into account when we recruited our nanny.
I'm going back to my spreadsheet then and will try to figure out how much additional cost this means to me

Got my answer, for anyone who's interested, for new employers registering between April 2015 and December 2015, the new pension legislation applies from October 1st 2017

Even if they want to opt out parents will still have to set up the scheme . I agree with TranmereRover that it is probably going to have an undesirable effect as the additional cost and the admin burden is high. As for pay increase, that by itself is hard to justify (regardless of pensions) when one looks at how exponential the tax/NI cost is. I am very supportive of nannies having pensions and NI etc , but it would be helpful if parents had some of this cost deductible.

I'd imagine the payroll companies will set it up for you, but at a charge of course......

Reading this thread, I have some concern that nannies may be pressured by employers to 'opt out'

I would hope that parents would not try to persuade their nanny to opt out. If the administrative burden can be minimal and if parents factor in the cost of employers contribution when deciding on the salary to offer their nanny, then it should be fine.
Some parents try to avoid employers NI and responsibilities of being an employer now, so I can see that some may try to get around needing to provide a pension.

Persuading the nanny to opt out would be unwise/illegal and I am going to be very very careful not to do this - I think my nanny may well want advice and I am going to be very clear that I'm not allowed to give it

Making it clear that the employer's contribution will be instead of a payrise, not as well as, seems perfectly reasonable.

Pretty sure you are not (officially) allowed to say that your employer contribution is instead of a payrise!!!! I'm sure I read somewhere that you can't take into consideration. But of course (true of all small employers) there is a pot of money for paying 'staff' -you can only pay what you can afford - so it has to be taken into consideration when determining running 'costs'....just like employers NI....it is part of the total wages bill.
The Opt out thing is pointless to save admin because you have to set it up anyway and take the first deduction - opting out just makes admin (which was the point I think) if you pay the same amount every week etc and can set up automatic payments etc. And as long as you are paying over NMW means you just pay less...no/reduced payrise until you have covered your extra cost so isn't actually costing employers anything really in the long run...
A bit different for my case - part-time staff and variable wages - I will have to calculate it and make different payments every month to a pension provider -some months nothing but I will have to tell them and afaik write to the staff to inform them that nothing has been paid - it will be an absolute PIA. I think for small amounts (which is what I m talking) they should allow something like PAYE where you pay quarterly...(I would love the one autoenrolled one member of staff to Opt out ...but wouldn't/not allowed to encourage it)

But my biggest objection is that it this money is being paid to a private company - who pay massive wages to their chief executive, advisors (£30k for 10 days work a year!) directors etc - and that money is coming out of the pensions of people who are likely to be poorly paid...think something involving NI would be so much better...