If you pay for a nanny or other domestic help from your own pocket you’ll be aware of the stiff tax and NI costs. Could you reduce these by putting them on your company’s payroll?
Employer obligations
If you employ a nanny or other domestic staff, broadly speaking you have the same employment obligations as you do for those who you employ for your business. You might therefore think that adding your nanny to your company’s payroll might save you a great deal of extra hassle. For example, they would be included in your firm’s workplace pension, which would save you having to set up a scheme especially for them. However, there are tax and NI issues to consider.
Company tax deduction
By making your nanny an employee of your company rather than of yours, their wages won’t count as a personal bill but a company liability. This means that it will be entitled to corporation tax relief for them, whereas employing a nanny directly would not entitle you to any. However, you don’t get away entirely scot free.
Benefit in kind
Where your company employs your nanny it counts as a taxable benefit in kind for you. But compared with paying them out of your net of tax and NI salary there are financial advantages.
Tax charges and NI savings
The best way to work out the overall tax and NI effect is to compare the positions where on the one hand you pay your nanny out of your net salary, while on the other you take a reduced salary but your company employs your nanny. There’s a clear overall advantage to the latter.
Where’s the saving made?
The saving arises because unlike salary you don’t pay NI on benefits in kind. The amount you’ll save will be between 2% and 12% of whatever your nanny’s pay is.
The savings are greatest where your salary, before reducing it to account for your nanny’s wages, is below the NI upper earnings limit (£50,270 for 2021/22), even where you take dividends to top up your income.
Example – low salary. Edward is a director and shareholder of Acom Ltd. In 2021/22 his annual salary is £20,000 and he expects to draw any additional income he needs as dividends. He employs Jan as a nanny and pays her £17,000 per year. In April 2021 Edward switched Jan’s contract to Acom and reduced his salary correspondingly. This saves him a little under £2,000 for the year.
Example – high salary. Jack is also a director of Acom, has a salary of £90,000 per year but lower dividends than Edward. He also pays a nanny £17,000 and moves her to Acom’s payroll in April 2021. This saves Jack a little over £300 for the year.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.