Thousands of childcare employers and workers are belatedly waking up to the fact that profits will be hit and pay packets reduced as a result of last month's hike in national insurance contributions.
Although leading figures in the profession had warned about the impact of the NI increases, announced in last year's budget, it is clear from readers' calls to Nursery World that some employers and workers were caught unawares by the changes.
It is estimated that childcarers will be about 100 a year worse off, and Rosemary Murphy, chief executive of the National Day Nurseries Association, predicts the increase in employers' NI contributions will cost the sector around 7 million a year.
Employees now pay 11 per cent NI on all earnings between 89 and Pounds 595 per week. Previously, it was 10 per cent on earnings between 89 and 585. Higher-earning employees now pay 1 per cent on all earnings above 595 a week.
Mrs Murphy says, 'If you take an average nursery worker earning, say Pounds 12,000, the 1 per cent increase will cost them 74 per year.
Employers have to pay an extra 1 per cent on all staff salaries over 89 per week.
'With staff salaries representing around 70 per cent of a day nursery's turnover, the sector will be hit hard by the 1 per cent increase in employer's NI contributions.'
Even employers prepared for the changes expect staff to be disgruntled when they receive their monthly pay packets. Sandra Hutchinson, proprietor of the Primley Park Nurseries chain in Leeds, says, 'The staff will just look at the bottom line, and see that 'they' have taken money off their wages, blaming their employers not the Government. I am going to put a note in wage packets explaining what is happening and saying, "The Government has taken this money out of your wages".
'We gave the staff a 1,000 pay rise in January to pave the way. They are now going to get less money in their pay packets, so we would need to put their salaries up again to keep them ahead. Any extra, of course, attracts the increased NI contributions from them and us. I can see this adding 5 per cent to our staff costs.'
Minimum wage
Employers face further financial hurdles in the near future, with a 16 per cent hike in the minimum wage over the next two years, to 4.50 an hour for adult staff this October and, if economic conditions allow, to 4.85 an hour next year.
Mrs Murphy says, 'Increases in the minimum wage in the autumn will add to costs, leaving nurseries yet again with no option but to raise fees at rates higher than inflation. Any advantage of Child Tax Credits and the proposed benefits from employer support of childcare could be largely wiped out by the increases in fees that day nurseries will be forced to make.'
Tax loophole closed
At the same time, many childcare settings will be hit by an Inland Revenue initiative to close a tax loophole which up to now has enabled husbands and wives sharing ownership of a company to pay less income tax.
It has been common practice in small companies, such as nurseries, to divide ownership of the shares between the husband and wife, with them drawing profits partly as salary and partly as dividends on the shares.
Paying some of the dividend to the spouse acting nominally as company secretary has helped the main earner stay out of the higher tax bracket.
The Inland Revenue has caught up with the practice, and is invoking a section of the Income and Corporation Taxes Act that allows it to attribute income and tax to the person it deems is doing most of the work.
Red tape
Nursery managers, like their counterparts in all business sectors, are beset with red tape. On top of the rules and regulations relating to childcare, providers have to cope with the demands of new employment laws, stakeholder pensions, flexible working, the Working Time Directive, new paternity rights and increased maternity provision.
Mrs Hutchinson explains, 'My paperwork has increased enormously. I am taking on another member of administrative staff next month, so that is another Pounds 13,500 a year to find.'
Business planning
Planning is the key to coping with the increasing bureaucratic and financial burdens, but it is not always straightforward. Sylvia Archer, who with her twin sister Theresa Ellerby jointly owns the Children's House Nursery in Stallingborough, Lincolnshire, says the national insurance increase did not hit them as hard as it might have done because they were able to give their staff generous pay rises from the funding for their new neighbourhood nursery.
'Although we have got the NNI funding and the revenue funding, the Government did not take account of the increases in NI and the minimum wage when the revenue funding was awarded. This is because it is based on your business plan. But when you write your business plan, you don't necessarily know that the minimum wage is going up or what the impact of national insurance will be.
'So we are having to absorb these increases. We have three years revenue funding and have been able to put up salaries, and we promoted seven members of staff, but we have told staff we do not know when the next pay rise will be.'
Anne Beadle who, with Margaret Petre, owns the ABC nursery in Copeland, West Cumbria, says, 'We raised fees from 2.70 to 3.00 an hour last September, to pay for the increases in the minimum wage and national insurance and we passed it on to the staff with a pay rise.
'We told staff they would later see their pay packets reduce when the national insurance rise came in, but I think people will be disappointed when they get their next pay packet. We have warned them, and obviously they got the increase six months ahead of the NI rise so that has been a help.'
She adds that there is little room to manoeuvre to maintain profitability.
'We have to make a profit to keep running, so we keep running costs to the bare bones. We have a very good reputation and we are full so we have cut our advertising budget. This year we cancelled our advertisement in the Yellow Pages and saved 100.'
Mrs Hutchinson also feels business planning is harder because, she says, 'there are so many different factors to take into account, and there are no obvious areas for savings. I think our books are going to look OK this year, but looking ahead it could be harder.'
In the meantime, however, she has tried to offset any disappointment that staff may feel due to the cuts in take-home pay by introducing a quarterly bonus scheme.
