The true cost of employing a nanny

Of the 30,000 nannies employed in the UK, a fifth are paid cash in hand. But now the taxman is determined to recoup all the missing tax and National Insurance. Merryn Somerset Webb investigates the real cost of childcare.

The UK is in big trouble. How much trouble? About ten percentage points of GDP worth. That's the difference between our tax take as a percentage of GDP and the amount our government spends (around 36% versus around 46% respectively). The authorities are doing their best to deal with this seemingly intractable problem with a minor programme of spending cuts and a very major programme of financial repression (keeping interest rates way lower than inflation). But while they wait for all this to work (it could take a decade), it clearly makes sense for them to try and push up the tax take in any small way possible.

That's why we have seen a rolling campaign against loopholes of all sorts (epitomised by the £50,000 cap on tax reliefs announced in the budget, a measure that appears to take out the investment bonds industry and the charity sector with one blow) and another against tax evaders of all kinds. First it was plumbers, then it was dentists and doctors. Now it is nannies. According to the government, there are 30,000 nannies working in the UK, one-fifth of whom are not paying or having paid for them all the taxes that are due. You can see why. Hire a nanny in London for £500 a week and you might think your total cost of childcare comes to £26,000 annually. But you would be very wrong. Add income tax (£104.93), employee's national insurance (£63.65) and employer's national insurance (£73.79) and it comes to £38,583. Which is why so many otherwise law-abiding parents take a deep breath and pay the people looking after their kids in cash.

So what do you do if you haven't been paying all you should? You could hope that you get away with it which you might. But if that isn't a risk (moral or absolute) that you fancy taking, you will need to contact the HMRC and tell them. Then you will have to pay a fine of some sort (think all the tax due plus a 100% fine) and get started on the pile of paperwork that comes with being tax-compliant. You'll need a P16A to get your payroll service started, says The Daily Telegraph. You'll need to fill in bits of your nanny's P45. And you'll need to make sure you are getting their holidays, sick pay and maternity rights right as well.

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If you can't face that, you can delegate it to a nanny tax firm who will do it all for you (adding yet another cost). Otherwise you can do what thousands of other professional women, faced with almost impossible bills and admin, do: go part time and hire a live-in au pair to help. Pay under £143 a week and you and HMRC will have no business with each other (see for more).