Cut it out

When parents employ you as a nanny there are two practical issues they will immediately have to face. The first is the cost of your employment - which comes out of their own pocket, and which is considerably greater than the net (take-home) pay they may have agreed with you at your interview. There is no doubt that this can be a strain on many parents' personal finances. The second issue is the responsibility they face as an employer to administer a PAYE scheme on your behalf and pay tax and National Insurance (NI) contributions to the Inland Revenue, as well as providing you with regular payslips showing these deductions and various other forms, such as a P45 when you leave and your P60 annual summary of earnings.

Your employer has to register with the Inland Revenue for this purpose. But what if they don't? Or what if they try to cut the cost of employing you by only declaring part of what they pay you? Or perhaps they have recently read some (rather irresponsible) press reports claiming that they can save money by setting you up as a service company rather than an employee.

Any option they choose other than to bite the bullet and act properly as an employer - declaring your full salary and keeping your tax records up to date -could seriously disadvantage you, and your employer. In some cases they could even risk a prison sentence or heavy fine. The point of this article is to explain why any forms of 'cutting corners' that they might propose are not in your interest, nor ultimately in theirs.

ANYTHING TO DECLARE?

When US President Clinton was first elected in 1992, two of his appointees to the posts of Attorney General and Supreme Court judge were rejected by Congress when it came to light that they had not been declaring domestic staff working for them to the tax authorities. This is the most ill-advised route for any employer to take. Since January 2001 it is a criminal offence in the UK for an employer not to declare any type of employment, carrying a maximum penalty of a prison sentence or heavy fine. The fact that this offence has been upgraded from a statutory one to a criminal one should signal the seriousness with which the Inland Revenue and the Government now take this issue. Apart from breaking the law, an employer could risk doing serious damage to their professional or social standing by not employing their nanny properly.

The bottom line for you, if your employer is not registered as such, is that you are invisible as far as the tax authorities are concerned. This means that no National Insurance payments will be made towards future state benefits such as pensions or unemployment, and if you become sick or pregnant you will not be entitled to any statutory sick pay or maternity pay. Without proper payslips and tax records you cannot apply for a loan or give a landlord any proof of earnings when you want to rent a flat.

CONVENIENT NANNY MYTHS

There are several myths that parents sometimes buy into to convince themselves that they do not need to register as an employer. One is that either they or their nanny come from abroad and so are not subject to the UK tax system. This is wishful thinking and it is simply not true. All employment that takes place within the UK is subject to UK tax law, regardless of the country of origin of employer or employee.

Another convenient myth is that they don't have to pay any tax if they are only employing you for a short period of time, say a few weeks or months. Again not true.

If you are a nanny from Australia or New Zealand, perhaps your employer is relying on your returning home when you cease to work for them, so that your 'invisible' status will never come to light. In this case you would still be losing out, since there are actually reciprocal arrangements between the UK and most Commonwealth countries under which National Insurance payments made to your account for employment in the UK can be transferred back to your account in your country of origin when you return there to work. And then again, what if you change your mind and decide to stay?

PART-DECLARING SALARY

A more widespread, but equally inadvisable, practice than not declaring your employment at all is part-declaring or under-declaring your salary in order to pay less tax, National Insurance and employer's NI contributions, and paying cash for the top-up to an agreed net wage. A working-mother radio broadcaster who interviewed me recently told me that she knew of several parents employing nannies were doing this, and she asked me to comment.I pointed out that the problem with this, apart from avoiding paying tax and breaking the law, is that it too limits a nanny's proof of earnings to the part of her salary which is being declared. This could make the difference between being able to get a loan or a mortgage, or renting a flat, and not being allowed to. Your NI contributions which go towards your state pension and other benefits will also be lower than they would be otherwise.

A further disadvantage for you is that if you become pregnant, you would normally be entitled to an initial period of statutory maternity pay (SMP) based on nine-tenths of your declared gross salary. But if your apparent gross salary is artificially low because of under-declaring your salary, then your SMP entitlement will be correspondingly low and you can't argue about it. If your employer agrees to top up your SMP out of their own pocket, then it will end up costing them far more than if they had declared your full salary in the first place, since they are entitled to a full refund from the state on any SMP they pay you, based upon declared income. And they may also be having to pay for a second nanny to cover for you while you are on maternity leave. So, both you and the employer lose out.

A SERVICE COMPANY

This 'tax dodge' recently received some publicity in the national press. The basic idea is that a nanny's employer sets up a service company with the nanny as the main director. You bill your employer for your services. They pay your company, which then pays you a very low salary, resulting in much lower tax and NI charges - and you then receive the balance of your remuneration in the form of dividend payments from the company.

This would indeed cut the cost of NI quite substantially. However, it would involve both you and your employer in considerable extra paperwork, in your case completing a personal self-assessment tax form every year, as well as complying with your duties as a 'director'. As in the previous example, the main drawback for you is that the amount of salaried income you can declare is minimal, while dividend payments will not be accepted as proof of earnings in the way that wage slips are accepted by a bank or building society. Any institution you deal with will rightly consider you to be an employee, not a company director!

There is also a strong likelihood that the Government would close this loophole if a number of employers tried to use it, since it was certainly not intended to be used to facilitate cheaper domestic employment.

ALL DUE RESPECT

Would you be prepared to jump through these kind of hoops for your employer just to save them money, when in practice their gain could be your loss? Looking at the down-side for you, what all these ways of 'cutting corners' have in common is an employer putting their own financial interests before your interests as an employee, to the detriment of your own financial standing and your statutory entitlements, not to mention your happy working relationship with the employer.

To give employers the benefit of the doubt, they may not be fully aware that what they are proposing, or even already doing without consulting you, does actually disadvantage you. But once you point this out to them, if they still insist upon cutting corners then perhaps you should think about finding another employer who plays by the rules.

Showing consideration and respect for you as an employee can work wonders in making you feel supported in your job - and this should matter more to them, and to you, than saving some money at your expense.

Stephen Vahrman is the proprietor of the payroll service Nannytax