Merryn's Blog

Why your nanny should be tax free

If nannies were paid out of a parent’s pre- rather than post-tax income, we might see fewer women giving up their careers to look after their children, says Merryn Somerset Webb.

Childcare costs in the UK have risen by 19% over the last year. Given that most of us would have considered ourselves lucky to have had a 2% pay rise over the same period, that's a hell of a hike.

It also might give our leaders something of a clue as to why there aren't as many women in work as they would like, and more particularly, why there aren't as many women in high positions as they would like.

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Say you are 35 and heading for the top in your career. You make £55,000, and have hopes of making more like £80,000 by the time you hit 40. Sounds good. But there's a hitch.

You've got two pre-school-age kids and you live in London. Nursery care comes to at least £10,000 a child, and probably more like £12,000. It could even be more.

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A reader tweeted me yesterday to say it cost them £28,000 for two children. However, if we stick with £12,000, so £24,000 for two, the cost means that the mother* has to earn around £33,000 just to break even. On her £55,000 salary, she is clearing £14,800 after tax.

Chuck in her travel and incidental expenses (to say nothing of the nightmare of mornings spent dressing, feeding and dropping tiny children off at nursery before going to work herself), and you can see why she might find it all a bit of a waste of time. But worse, nursery isn't enough to cover the needs of a modern career.

If she is aiming for the top, she needs flexibility. She needs to be able to be in the office long before her local nursery opens on occasion, or perhaps every day. She needs to be able to work unpredictable hours, to go on overnight trips and so on. She needs a nanny. So, let's look at that.

A good live-out nanny in London who will cover her employer's hours at work and her travel (remember the nanny always works longer hours than the working mother) will want around £600 to £700 a week in her pocket after tax (see here for average fees).

Let's say we find a cheap one at £560 a week. Once you have included her income tax and national insurance (NI), and the additional employer's NI, that comes to £826 a week.

That's £42,952 a year out of your own net salary. So, to break even on childcare alone with a live-out nanny, the mother has to make just over £60,000. You can cut that by going live-in if you have the space (which your average 35-year-old in London just doesn't).

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But even then the nanny will want £400 a week and the total cost will be around £30,000 a year requiring a break-even salary of around £40,000. And that is one of the reasons why a huge number of women give up on high-flying careers in their 30s, and hence why there aren't as many women running companies and the country as all political parties claim they believe there should be.

We all want our children cared for flexibly in our own homes. But mostly we can't pay for that and also have some cash left over to reward ourselves for bothering to go to work in the first place. So, what do you do about this?

It entirely depends what result you are after. If you consider this to be a matter of no significance and if you aren't much bothered by how many women get to fulfil their career ambitions, you do nothing.

If you think there should be less gender inequality at the top (and for the record I'm far from convinced that this is a worthy goal in itself), you might note that domestic staff are the only staff paid out of anyone's post tax rather than pre-tax earnings, and wonder if it might be a good idea to change that for the childcare of working parents.

That would mean that in a massive expansion of our current childcare voucher scheme all registered childcarers could be paid out of a parent's pre- rather than post-tax income, perhaps via the PAYE system; something that would make the break-even salary on a live-in nanny £30,000 a year, and that on a live-out nanny, £42,000 (or even less if we could dump the employer's NI too), and along the way keep many more of us in the full time workplace**.Assuming that's what we want.

I know you will all want to have a good argument about this. If you want to do it in person, bid here to have dinner with me (all for a good cause). The current bid is less than the price of a nanny for a week. Bargain.

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* I'm using 'mother' here, not 'father', for the simple reason that while there are many more female breadwinners than there were, it is still the case that the majority of higher salaries are still earned by men, so it is the mother's salary that is of interest when it comes to childcare costs.There are also still many more female than male single parents. You can however read 'mother' as 'father' all the way through if you prefer.

** Here's a tweet from @lizchong1 on the matter yesterday: "Current setup makes it almost imposs to work unless you earn lots/accept you'll make v little. Many friends dropping out".




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