From the first of this month, new National Minimum Wage rates have come into effect across the UK. This means that all parents employing a nanny, with the exception of nannies living within the family household , are required to pay a minimum gross hourly rate of 3.50 for nannies aged between 18 and 21 and 4.10 an hour for nannies aged 22 and over. The effect of this is that the minimum annual salary of an 18-to 21-year-old nanny working a 50-hour week anywhere in the UK should be 9,100, while for a nanny aged over 21 it should be 10,660. This is clearly good news for lower-paid nannies.
However, our last annual wages survey, conducted at this time last year, showed that many nannies are earning considerably more than this. A shortage of fully-qualified nannies, combined with an increased demand by parents for properly-trained and experienced nannies, has combined to push up nannies' wages sharply over the past two years. The average gross pay for a qualified nanny working in central London was shown to be 22,000, while in the Home Counties it was 17,752. Of course these pay levels are achieved in return for a working week which is often longer than 50 hours.
But employers are paying the price. While it is excellent news that nannies are receiving wage levels that they fully deserve, it is not such good news for the parents who employ them. Most nannies are paid out of the already-taxed take-home income of their employers, who are then unable to claim any form of tax relief for this expense. But if the same parents were starting a small business and employing a secretary or admin assistant, they would get 100 per cent tax relief on their employee's wage, which they could offset against the taxable profits of the business.
Only working parents employing private childcare in their home are being penalised by this tax 'double whammy'.
By way of example (see box below), a working mother has to earn a gross annual salary of 30,346 simply to pay her nanny a gross salary of Pounds 20,469, netting 300 a week. This is because the mother's own annual net income after tax and national insurance (NI) deductions would be 22,360, while the total cost of employing her nanny, including an employer's NI contribution - which is additional to her nanny's gross wage - would be the same 22,360. Further examples are shown in the table below, illustrating what a nanny's gross wage costs her employer and therefore what net and what gross wage the employer would have to make to be able to afford her. They make sobering reading for parents who are thinking of employing a nanny.
As a nanny's wages rise, so the double whammy tax effect gets worse. In the current tax year, the first 87 a week a nanny earns is free of tax or NI and the next 36 a week is taxed at 10 per cent. So the higher the wage above 123 a week (that is, 87 plus 36), the greater proportion of it carries standard rate tax at 22 per cent, as well as employer's and employee's NI contributions.
For example, for a nanny earning 10,500 gross a year - which is a total cost to an employer of 11,250 - 21 per cent of this total cost comprises tax and joint NI contributions, but for a nanny earning 20,469 gross a year, the percentage of the total cost (of 22,367) of tax and NI liability rises to 30 per cent. So higher wages spell larger statutory contributions for employers on their nanny's behalf - but without the benefit of any tax relief!
NOT JUST THE RICH
In effect, this means Government policy is falling far short of its stated aims. It is one of the Government's declared policy aims to enable mothers to return to work by supporting improved childcare provision and funding. But parents employing a nanny and paying 'double whammy' tax can hardly be said to be receiving any kind of Government support or encouragement whatsoever. The gap between the stated intention and the reality for parents employing a nanny could hardly be wider. Why does this glaring anomaly exist?
It seems there are certain assumptions behind the Government's failure to address this issue in a more effective manner. The main one appears to be the belief that only wealthy parents employ nannies, and so they are not considered suitable to receive tax reliefs or other financial incentives, as they can afford to meet the costs. This is simply not the case.
Why? First, by no means all parents employing a nanny nowadays are well-off. The social basis of nanny employment has widened considerably from its traditional upper-middle-class origins. For many of today's working parents, nannies are simply the only form of childcare flexible enough to accommodate their own working hours or career requirements. If parents are expected to work long days, shifts or unsocial hours, then using a nursery or a childminder, where a child has to be collected by 5 or 6pm every day, is simply not an adequate option. Also, many higher-earning working mothers are single mothers and not part of a double-income family unit, so they have even more need for flexible childcare than two-parent family units do.
The Working Families Tax Credit introduced last year contains a childcare tax credit element for parents using approved - and regulated - forms of childcare. These include nurseries and childminders, but exclude nannies. This seems a particularly hypocritical form of Catch 22, since at the time the tax credit came in, the Government had just been intensively lobbied to introduce a national register for nannies, and had refused to do so. Yet nannies' employers were excluded from the tax credit system on the grounds that nannying was not a registered form of childcare. As these tax credits for other parents are income-related, it cannot be aruged that parents employing a nanny can afford to do so without support through the tax system - as only those parents who meet the appropriate maximum income requirements would qualify for the credits.
But even if all parents employing a nanny were on good salaries - and this is clearly not the case - the Government's failure to remove the 'double whammy' even for higher-earning parents remains shortsighted. It also undermines the Government's stated childcare policy in a most crucial area. Many career women who employ a nanny - as our table shows - are having to allocate virtually their entire wage to paying their nanny. This means they are returning to work without any financial incentive for a number of years to come, except to maintain their place in the career structure. But these same mothers are being held up as role models, the working women that all other working mothers in lower-paid jobs, and young women in higher education, are being urged to emulate.
TIME FOR A CHANGE
So why is the Government still making it difficult for mothers to succeed by hitting them with a punitive tax regime? And what message does this send to other working women? Surely it is time for the Treasury to review the tax regime for nannies' employers and to offer them some type of financial break. If this also means introducing a statutory form of registration for nannies -designed to set minimum professional standards and provide some reassurance about a jobseeker's suitability - then surely this issue should also be put back on the politicians' agenda as soon as possible.
Moreover, it could be argued that providing some tax relief for employing a nanny would not cost the Exchequer or the Inland Revenue a penny in tax revenue. Indeed, it could increase it. This is because the current system encourages a 'black market' in domestic employment hidden from the taxman, as well as the practice of only part-declaring a nanny's salary for tax purposes (see 'Cut it out' in last May's issue of Professional Nanny). While tax evasion is illegal, it undoubtedly occurs. But if nannies had to be registered and their employers had to fully declare their nanny's wages to qualify for tax relief, it would bring more domestic employment into the legitimate economy.
This would also benefit nannies in the long run. Nannies may feel that it's all just their employer's problem, not theirs. But the high cost of employing a nanny without any tax relief from the state can put a great strain on the working relationship between parents and their nannies, and keep some from employing nannies at all. It is that bit more difficult to ask for a pay rise if you know your employer's finances are already under strain.
The growth in part-time and nannyshare jobs is at least partly due to the fact that many parents can no longer afford to employ a nanny full-time. Most nannies, however, would probably prefer the continuity, stability, and general job satisfaction that working full-time for one family brings. Without a rethink by the politicians, followed by a change in tax policy, fewer full-time nannying jobs are likely to be available in the future.
Stephen Vahrman is the proprietor of the payroll service Nannytax
