Parents face £1,000 'nanny tax' – how to afford it

A nanny and a child are sitting on the floor in a room with a lot of toys

(Image credit: Getty Images)

Hiring a nanny isn’t straightforward. The taxman classes you as their employer – just as they do for cleaners, gardeners and other household help. This means you must pay them through PAYE, ensuring that income tax, national insurance (NI), pension contributions and student loan repayments are paid. You must also provide holiday pay, a contract and payslips.

That all means you are also liable for the higher employer’s NI that kicks in from next April. The average salary for a nanny working outside London is £40,326, according to payroll company Nanny Tax. “On this, an employer will pay £4,309 NI and £1,023 pension contributions under auto-enrolment, bringing the total cost of employment to £45,658,” says Lucy Andrews in The Sunday Times. “From April the NI bill will increase to £5,299, bringing the total cost to employers to £46,648 – an increase of £990 a year.”

Nanny costs in London rise by more than £1,000

Parents in London will face an even bigger bill. In the capital the average full-time nanny earns £46,228, costing parents £52,551 a year once tax and pension contributions are included. This will rise by £1,061 in April. The cost of employing a nanny has already risen by 40% since 2021. To help small firms, the chancellor has extended the employment allowance, which allows them to offset higher payroll costs. But “the rules exclude workers who are being employed in a personal capacity to support the running of a household”, says Claer Barrett in the Financial Times.

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One option to cut costs is to employ a nanny with another family, either by splitting their hours between your two households or having them look after all the children together. “Draw up a clear contract to outline the terms, responsibilities, and timesharing,” Allie Bell from the National Nanny Association told The Sunday Times. You could also use tax-free childcare to help with your costs. If your nanny is Ofsted-registered, you can save their salary in a tax-free childcare account – see gov.uk/tax-free-childcare. For every £8 you pay in, the government will add £2 – to reflect the basic rate of income tax you’ve paid on your contribution – up to a maximum of £500 per quarter per child under 12 (or 17 if they are disabled). You can then put the money in your childcare account towards your nanny’s salary. However, if one parent earns more than £100,000 after tax and pension contributions you will not be eligible for tax-free childcare.

Another option is to “offer your nanny additional benefits in exchange for a lower pay rate”, such as more paid time off, suggests Imogen Tew in The Daily Telegraph. Finally, you could consider hiring a childminder rather than a live-in nanny. The cost of 25 hours with a childminder is around £157.68, around half the cost of a nanny’s wage for the same amount of time.

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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.