An example: a net wage agreement can be costly
By agreeing a net wage with your employee you are effectively agreeing to pay all their taxes, irrespective of their tax code or tax position.
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
Current rates and thresholds
Current tax thresholds
Your employer must register and deduct NI from your salary if you are paid £153 or more per week. Your employer must also register if you have another job, even if you are paid below the threshold.