Pensions for nannies – what do I need to know?

New legislation means you not only have to pay your nanny's tax and national insurance, you also have to pay your nanny's pension

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As if hiring a nanny wasn’t stressful enough, new legislation means you will soon have to start paying into a pension scheme for them.

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This is due to an update of the Pensions Act, which requires every employer in the UK to provide a workplace pension for their employees, and that includes families who employ nannies. 

But surely I’m not an employer if I just have a nanny?

Although you might not see yourself as an ‘employer’ as such, in the eyes of the law you are, even if you just employ one person like a nanny (or a carer for an elderly relative).

As such, you will need to start paying into a pension scheme at some point from June 2015 onwards. 

Does it apply to all nannies?

It’s compulsory in the UK if your nanny is:

  • aged between 22 and state pension age
  • earning more than £10,000 
  • entitled to a pension

If your nanny is aged under 22 or earns more than £5,824 but less than £10,000, it’s not obligatory. However, your nanny is entitled to ask you to set up and pay into a pension for them — and if they do, you have to arrange it.

What about nanny shares?

If you are part of a nanny share, how you pay your nanny’s pension depends on what kind of nanny share you are part of.

Alison Hull, director of nanny payroll specialists NannyMatters, explains that it’s worked out in different ways depending on whether your nanny has one employment or two separate employments…

One employment

“If the nanny has just one employment, they should be getting just one payslip each pay day. This time, the [nanny’s] total earnings are assessed,” says Alison.

“Just one [pension] scheme is required, and although it will be used for all earnings, it makes most sense to set it up in just one family’s name. That means it can be used over again when this nanny share finishes.”

Two separate employments

However, if the nanny receives several different payslips from more than one family, Alison notes that each employment is looked at separately. That means that “each employer must make an assessment based solely on what they pay.”

“It will normally be set up under the employer’s name, with the nanny enrolled as a member,” explains Alison. “When [the nanny] leaves, he/she leaves that employer’s pension scheme. The replacement can then be added to the pension scheme instead.”

“In other words, each employer has their own pension scheme, and they can use it for as many nannies or other household staff as they want. If they don’t recruit again, their pension scheme just lies dormant.”

Still confused?

It can seem pretty complicated – so it’s often advisable that anyone with a nanny share gets an expert involved, by signing up to a payroll company.

“We always advise any parents who are entering into a nanny share to sign up to a reputable payroll company such as NannyMatters or Nannytax, who are best placed to advise them on how to split the salary and the tax,” says Amanda Coxen, director of Tinies Childcare

“This will become even more important with the pension laws coming into effect, as the payroll company will have to look at the amount of salary they pay, and what their pension contribution will be.”

When will this come into effect?

It will take some time to roll out the changes and not everyone will have to start paying when it is first implemented in June 2015. However by February 2018, all employers will be expected to contribute to a workplace pension. 

How will I know when I need to start paying?

You’ll be contacted by the Government-run Pensions Regulator, who will let you know when you need to start paying into a pension scheme for your nanny.

The scheme is being rolled out gradually, so people are being contacted over a period of time. You don’t need to to pay anything until you hear from the Pensions Regulator, and the scheme won’t be backdated. 

At some point, you’ll be sent a letter to let you know when your ‘staging date’ is. The staging date is the date you need to start making contributions and the letter will arrive around a year before your staging date. 

Staging dates are calculated from your PAYE reference. If you want to start planning now, you can find out when your staging date is – by entering your PAYE reference on the Pensions Regulator site. 

What do I need to do when I get the letter?

There are several things you need to do before your staging date to comply with the law, including choosing your pension scheme. This will all be explained in the letter that has been sent to you.

If you have any concerns, you can contact the Pensions Regulator on 0845 600 1011.

How much will I need to pay?

Up until 2017 you’ll need to pay 1% of your nanny’s salary (minus £5,824) into a pension – but this will rise. By 2017 you will need to pay 2% and by 2018 this will rise again and you will have to pay 3%.

For example:

If you pay your nanny £20,000, the pension contribution is worked out from £20,000 minus £5,824 = £14,176

  • Before 2017 – 1% of £14,176 = £141.76 per year, or £11.81 per month
  • In 2017 – 2% of £14,176 = £283.52 per year, or £23.62 per month
  • In 2018 – 3% of £14,176 = £425.28 per year, or £35.43 per month

“The sums are relatively speaking quite small, but as working parents are already struggling to cover the costs of childcare, this just adds an extra burden on their creaking finances,” says Amanda Coxen.

“Parents also worry about the administration of the pension scheme. We have advised parents to speak to their payroll companies who should be able to provide them with a pension solution.”

What happens if I don’t pay?

You’ll face initial fines of £400 and will still have to pay the fees.

What about paying the nanny in cash?

That would be a no. We all know there’s a thriving black market in paying people in cash, and a government survey in 2009 suggested that around 20% of nannies were not paying tax or national insurance.

But HMRC (HM Revenue & Customs) has threatened to crack down on those avoiding paying their nanny’s taxes, commenting: “We expect to catch more parents who are avoiding PAYE [tax]. It’s not particularly hard to find them.”

According to gov.uk, you as the employer are responsible for deducting and paying your nanny’s income tax and national insurance contributions.

If you don’t declare to HMRC that you’re employing a nanny, you face being charged with tax evasion and could end up paying all the money owed plus a hefty fine.

There’s also concern that parents may pressurise their nannies into setting up a limited company and officially becoming self-employed, so that they can avoid having to make any contributions. Note that gov.uk says employers cannot ask their employees to become self-employed.

Amanda from Tinies Childcare says its unlikely that anyone would attempt to set up a limited company for the wrong reasons in this day and age:

“It is very unlikely that they [parents] will move to set up their nannies as limited companies as this loophole was closed by HMRC some years ago now.”

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