Wealth Warning – for both employers and their staff

The domestic employment sector is probably the only one left in the UK where wages are still commonly agreed on the basis of net (i.e. take-home) pay. It is surprising that this outdated arrangement has not yet been dispensed with, as there are considerable financial implications at stake for both employer and employee.

The following points briefly explain why, from an employee ’s perspective, a net pay agreement is disadvantageous.

The Government regularly increases the personal tax-free allowances and has cut the basic rate of income tax several times in recent years. If the employee has a net pay deal their employer does not have to pass any of the savings on to them. Only employees on a gross wage will automatically receive the benefit of any cuts by paying less tax and NI.
A domestic employee on a gross pay will see the direct effects of changes in legislation through paying more or less tax and NI, which will make it easier for them to make an educated decision when it is time to vote. In a word a net pay arrangement excludes domestic staff from an important part of the political process and effectively treats them like a second-class citizen.
A gross wage enables the employee to compare their salary with any other type of employee in the UK, thereby giving them an opportunity to assess their earning power and consider their career options.
A gross wage agreement is also essential if the employee wants to get a personal loan or a mortgage, as the figure the bank will be interested in is her gross salary. Similarly, if she wants to make sure they are being paid the National Minimum Wage, they need to know what their gross salary is.

A net pay deal is equally unfavourable to employers.

By agreeing a net pay the employer is essentially writing a blank cheque – committing to pay all their employee's tax and National Insurance contributions, irrespective of any changes in the legislation and without taking into account their individual tax code or tax position.
There are several reasons why a domestic employee ’s tax code can vary from a standard single person’s tax code; for instance, if they have two part-time jobs and their other employer is already using up their personal tax-free allowance in their wage calculations, then the second employer must pay tax from the first penny the employee earns, since the personal tax-free allowance can only be claimed once. Another reason for an unusual tax code would be if the Inland Revenue were collecting unpaid or underpaid tax from previous employment.
An increasing number of state benefits and tax reliefs are paid through the payroll mechanism as an offset to employee tax and NI liability. Any taxable benefit provided by the employer, such as the personal use of a car, will increase costs if they are based on a fixed net wage.
The difference between a net pay and the actual cost of employing can be staggering (up to 50% more) and may come as an unpleasant surprise, especially to an inexperienced first-time employer

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