Wealth warning
Always agree a gross wage with your employee or run the risk of seriously damaging your wealth.
Domestic employers often agree a net (i.e. take-home) wage with their staff, but in reality any employee is always paid a gross salary, with tax and National Insurance Contributions deducted and paid to HMRC on a quarterly basis by the employer on behalf of the employee. Although many employers tend to look on this as an additional cost, it is actually part of the gross wage. On top of the gross wage, employers also have to pay an Employer's National Insurance Contribution for each employee.
Domestic employment is probably the only profession 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 It is surprising that this outdated arrangement has not yet been dispensed with, as there are considerable financial implications at stake for both employee and employer.
- By agreeing a net pay you are essentially writing a blank cheque - committing to pay all your 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 an employee’s tax code can vary from a standard tax code; for instance, if they have two or more part-time jobs and their other employer is already using up their personal tax-free allowance in their wage calculations, then you, 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 HMRC 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 a domestic employee can be staggering (up to 50% more) and may come as an unpleasant surprise, especially to an inexperienced first-time employer.
A net pay arrangement is equally unfavourable to your employee.