Save on your nannys tax ???

[kaz33]

This is more a theoretical question as I am about to quit work to have baby two but I have recently discovered that it is possible to set up a company to employ your nanny. This saves on income tax and national insurance - although you do have to pay corporation tax. The info I saw suggested that on a £350PW net salary you would save just over £7000 per year - less the accountants costs of just under £1000. That would have saved us a stonking £500 per month which would have made a huge difference.

Does anyone do this ? Does it work ? Are there any problems ? Why do more people not do this ?

Yes, we looked into this and the savings are considerable although not quite so large as suggested above if the Nanny doesn't want to threaten his / her access to a state pension as they need to maintain NI contributions. I think our savings worked out at around £3,500 a year which we were willing to pass on to her aside from costs.

Unfortunately she wasn't willing to pursue it as she was told that it would impact her private pension. I don't personally see how this was the case and in any event, the extra money would have more than compensated. She was also worried about dismantling the company at the end. It all ended fairly disastrously for us as when we did give her her subsequent pay rise, she was very unhappy that it was smaller than the tax savings we had outlined would have been!. Unfortunately she wasn't especually interested in the fact that the £3,500 wouldn't have been funded by us, she just wanted it.... Anyway, any accountant should be able to provide details and quotes etc.

I've just instructed my accountants to do this (they are my work accountants and advised this in a meeting with them) I pay all the accountants fees for setting it all up and it saves me around 2k I am passing on some of that the the nanny but not all as she is paid well at the moment. There is no tax for her to pay at all since you can take 10k as dividends tax free and pay yourself a salary of 4615 without tax but getting ni benefits - I don't think she gets oveinvolved with it all and will still get a weekly salary off me but she may have to issue an invoice once a year. Not oversure about that bit

I am assuming you have talked her through it as the company will be in her name and will legally be her responsibility.

Interestingly enough, Nannytax have just sent me the years end information for our nanny and have now started an option where they set up this scheme for you, at a cost of course. They also provide information sheets for you the employer but also the nanny - which might help convince them that it is a sensible thing to do.

They also give figures on the cost of the new national insurance figures - on a salary of £350 net per week you will have to pay roughly £50 more national insurance per week --- AAAAAAGH.
That of course is on top of your increased national insurance that you pay yourself.

Did anyone spot in the budget announcements that, with immediate effect, the rules are being changed to close the nannytax loophole? Anyone currently using this scheme will now be facing an instant big increase in costs.

This is what today's Times had to say about it:

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The Chancellor dealt a fresh blow to Middle England when he closed a loophole that allowed families to save thousands of pounds in tax and national insurance by paying their nanny through a limited company (Mark Atherton writes).
Mike Warburton, senior tax partner of Grant Thornton, the accountants, said that families can make big savings by employing a nanny or other domestic worker such as a butler in this way. Typically, the savings are about £5,000 on a £20,000 salary. A limited company structure enables a family to avoid employer?s and employee?s national insurance contributions, as well as income tax on the nanny?s pay. Instead, the company pays corporation tax, helping to reduce the overall tax bill.

But with immediate effect the Inland Revenue will require ?intermediary? companies, such as those set up to employ nannies, to pay tax and national insurance in the normal way.

The Inland Revenue argued that workers who would be treated as employees if engaged directly, rather than through a company, should not avoid paying tax and national insurance contributions on the same basis as other employees.

Mr Warburton said: ?It seems a bit small-minded for the Chancellor to introduce this measure affecting a relatively small number of people.

?This is not so much a loophole as a natural consequence of the rules he himself has brought in on the tax treatment of dividends and corporation tax rates on small businesses.?

Blimey, not all bad news - DS2 ( due soon ) will get £250 for me to invest for him !!!

We do have a high standard of living but we both also work hard for our money and it does appear to be a little unfair. I am all in favour of income re-distribution but we are both paying tax, bringing up children and employing a nanny and cleaner - all contributing to the economy..

Long term it just appears to be pushing childcare into the black market.

Also, there are a significant number of people for whom Nannies are the only realistic childcare option given their hours of work and travel commitments etc. Part of the reason why I am giving up work is that even on a city salary, the cost of a Nanny's salary combined with the double tax and NI means that for the amount of money you are actually left with, it is simply not worth the stress etc. The net loss to the government of my decision is a substantial amount of revenue from two taxpayers.

I am really looking forward to finding a job in time which means that I don't have to pay crippling childcare costs in order to do it.