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An example: a net wage agreement can be costly PDF Print E-mail

Domestic employment is one of the last professions left in the UK where wages are still commonly agreed on the basis of net (i.e. take-home) pay. It is surprising that net pay arrangements are still so common, especially when you bear in mind the financial implications at stake, both for the employer and the employee.

The difference between a net and a gross wage can be as much as 50%.Stafftax has been advising parents for many years to always discuss and agree salaries in gross terms for many years, yet we frequently receive calls from potential employers who are unaware of the real cost involved with domestic employment. Once they find out that the difference can be as much as 50% many realise they can't afford to employ them at all, or they decide to only declare part of the salary in an attempt to save money, which not only is illegal but also has real-life implications for the employee.

By agreeing a net wage with your employee you are effectively agreeing to pay all their taxes, whatever these may be. In other words a domestic employee on a net wage agreement will always take home the same amount no matter what their particular tax code is or whether they have unpaid tax from a previous place of work. This may be good for them; however, for you it could prove to be a costly decision.

Consider the following:
If you agree a net salary of £300 per week the gross salary would be approximately £390*, but in addition to the tax and NI you must also pay employer's NI contribution, which in this instance would be approximately £37, bringing the total cost to £427. The difference between the agreed net pay and the real cost is 42%. For many employers that is too much, and they may realise they can't afford to keep their employee.

If the employee is not on a standard tax code or there is unpaid or underpaid tax from previous employment, it could become even more expensive. To read more about the pitfalls of agreeing a net wage from an employer's point of view, please click here.

*tax year 2008/2009



employment guide

Can domestic staff be self-employed?

"Can't I just ask my employee to sort out their own tax?" this is a question we're frequently asked by potential employers. Whether someone is employed or self-employed depends on the terms and conditions of their work. It is important for all employees to know their employment status as it affects employment and benefit rights, and how to pay tax and National Insurance Contributions.

It is equally important that you, as the employer, are absolutely certain whether it is your responsibility or theirs to declare tax and NI.

How to determine employment status
A worker is probably considered employed if they:

  • have to do the work themselves
  • can be told at any time what to do, where to carry out the work or when and how to do it
  • work a set number of hours
  • can be moved from task to task
  • are paid by the hour, week or month
  • can be paid overtime or receive bonus payments

A worker is probably considered self-employed if they:

  • can hire someone else to do their work or engage helpers at their own expense
  • risk their own money
  • provide the main items of equipment needed to do their job, not just the small tools that many employees provide for themselves
  • agree to do a job for a fixed price regardless of how long the job may take
  • can decide what work to do, how and when to do the work and where to provide the services
  • regularly work for a number of people
  • have to correct unsatisfactory work in their own time and at their own expense

*Please note that these lists are not exhaustive.

The exception to the rule
It is clear to see that in most cases domestic employees do not meet HMRC's criteria for self-employment.

However in some cases HMRC do grant self-employment status to domestic workers. It is very important to remember that if you take on domestic staff who was previously self-employed they should contact the Revenue and request confirmation in writing that their status still applies in the new position.

Transfer of self-employment status between jobs is not automatic, and each situation should be considered individually. This is the employer's responsibility, and if they do not receive written confirmation from the Revenue and it later comes to light that the worker is not self-employed, then it is the employer, not the worker, who will pursued for unpaid taxes. And in the eyes of the law it is a criminal offence not to declare an employee and pay tax and NI contributions on their behalf.

employment law

A step-by-step guide to make sure your employee can work in the UK

When you consider employing someone you must carry out basic document checks to ensure the person is entitled to work in the UK. Nannytax has put together a guide to help you with this process.