Taxes and responsibilities: Doing your homework on using childcare


Choosing the right person to look after your young child when you are not there is a huge decision. There’s a lot to consider, and everyone’s priorities are different.

Of course you want someone who will be kind, nurturing and responsible. Beyond that, it might be important to you that your little one gets to stay in your own home, or that they can mix and make friends with other kids outside of the house. Perhaps you are focused on what they will learn with their caregiver, or maybe logistics such as antisocial hours and transport are critical for your family. You might be thinking about Ofsted registration, first aid qualifications, training or experience in looking after children with additional needs. And because we all live in the real world, price has to be part of the equation too.

One thing that might not be on your radar is the legal and tax situation. But it should be. And to complicate matters, this changes depending on the capacity in which your caregiver works for you.

What are my childcare options?

You’ve decided that you want your child to be looked after by one person, rather than sending them to a nursery. You have three main options: a babysitter, a childminder or a nanny.

Babysitters

Babysitters tend to be seen as a casual, non-professional option. The cliché is the teenage neighbour who will mind the kids for a few hours while you treat yourselves to an anniversary meal, in return for £30 plus access to your Netflix account and the contents of your fridge.

While there is definitely an element of truth in this, some babysitters do operate more professionally. They may be nannies or nursery workers looking for some extra income to top up their wages.

The key points to remember are that babysitters:

  • Are self-employed
  • Are paid by the hour
  • Tend to work casually, although you may have a regular arrangement
  • May work for lots of different families
  • Normally work in the family’s home

Their self-employed status means you don’t have to worry about tax and national insurance (NI). It is the babysitter’s responsibility to register for self-assessment, declare their income and make whatever payments are required.

What will my babysitter need to do?

The taxman isn’t interested in a teenager earning a little bit of extra pocket money. That’s why we have the trading allowance rule. It means anyone who earns less than £1,000 a year from self-employment or casual work doesn’t need to go through the hassle of registering for self-assessment. This money is not declared or taxed.

Anyone earning over £1,000 will need to register for self-assessment and pay whatever tax and NI is due. They will only pay income tax if they earn more than the personal allowance—for 2022/23, that’s £12,570. At the minimum wage, that’s a lot of babysitting. However, NI kicks in much sooner.

People aged under 16 do not have to pay NI. But they do still need to register for self-assessment if their earnings exceed the £1,000 threshold.

What are my responsibilities?

  • Pay at least the national living wage (over 23s) or minimum wage (under 23s). You can find the latest rates here. There is no minimum wage for under 18s.
  • If you use a babysitter aged 16 or under, make sure you follow the rules on working hours for children.
  • Bear in mind that by paying a professional babysitter in cash, you could be helping them to dodge tax. Bank transfers help keep things above board.

Childminders

Childminders operate in their own homes. They care for pre-school children on a more formal footing, and often also do school pickups and provide wrap-around and holiday care for older kids.

Any childminder in England who looks after children under the age of eight must be registered with Ofsted (or the equivalents in Scotland, Wales and Northern Ireland). This process includes DBS checks. Those caring for under-fives must follow the Early Years Foundation Stage (EYFS) framework. There are ratios specifying how many children in different age brackets a childminder can look after at the same time—including any children of their own.

As costs are spread across multiple families, a childminder can be a cheaper option than a nanny. But larger families should beware: you pay per child, which can drive up the cost!

The key points to remember are that childminders:

  • Are self-employed
  • Set their own rates
  • May look after children from different families at the same time
  • Will require you to sign a contract agreeing your hours and other terms
  • Work in their own home

What will my childminder need to do?

Your childminder is operating a business and is responsible for everything that comes with that: paying tax and NI, taking out liability insurance, registering with Ofsted and so on.

Most childminders operate as sole traders, although some are structured as limited liability companies or limited partnerships. The form they opt for doesn’t alter your position: you are a customer of their business.

If they are signed up to the relevant schemes, you should be able to use the government’s tax-free child care scheme or claim your free hours of child care. If they are not, ask if they would be willing to participate.

What are my responsibilities?

  • Make sure you read and understand the contract. It should include agreed hours, prices, notice periods, payment arrangements, your childminder’s holiday entitlement and other formalities.
  • Clarify anything that’s not in the contract and any extras (e.g. do you need to supply your own nappies or milk?).

Nannies

Despite the Mary Poppins image, nannies are not just for the super-rich. While they are expensive for just one child, they can actually work out cheaper than a nursery or childminder for families with two or more children. Some families spread the cost through a nanny share arrangement.

A nanny works in your home (and in some cases even lives there too). Nannies may work full-time or part-time hours and may perform light household duties alongside child care. A nanny can become like part of the family, with deep bonds developing.

The key difference between a nanny and a babysitter or childminder is that you become their employer. This is a definitely not child’s play—underestimate the responsibility at your peril!

The key points to remember are that nannies:

  • Are employed by you, which means a contract and full employment rights
  • Work for a negotiated salary
  • Look after your children only (unless you are in a nanny share)
  • Work in your home

What will my nanny need to do?

Nannies are employees paid through PAYE so shouldn’t need to worry about completing a tax return or taking out liability insurance. It is always a good idea to check payslips and make sure that the correct deductions are being made.

It’s good practice, but not a requirement, for nannies to register with Ofsted (or the local equivalent). You can use the government’s tax-free child care scheme or claim your free hours of child care with a nanny, but only if they are registered with the relevant regulator.

What are my responsibilities?

  • Check that your nanny is allowed to work in the UK.
  • Take out employer’s liability insurance.
  • Ensure that your nanny has enhanced DBS clearance.
  • Pay at least the national living wage (over 23s) or minimum wage (under 23s). Pay may reflect factors such as experience, number of children, location and antisocial hours.
  • Provide your nanny with an employment contract and payslips.
  • Ensure that your nanny does not work more than the maximum permitted weekly hours.
  • If your nanny meets certain criteria, you will also need to pay statutory maternity/paternity pay, sick pay and redundancy pay, give them 5.6 weeks’ paid holiday a year, contribute to a workplace pension and more.
  • Register with HMRC as an employer and set up a PAYE payroll scheme. Deduct and pay your nanny’s income tax and NI contributions.
  • Pay employer’s NI contributions.
  • Declare certain benefits in kind—for example if you pay for your nanny’s Ofsted registration, mobile phone contract or gym membership.
  • Never pay your nanny in cash to avoid tax. You could end up facing back-payments, hefty fines or even prosecution.

That all sounds pretty daunting!

A payroll company can make your life much easier by handling many of the administrative tasks. Alternatively, you can opt to employ your nanny through an agency who will take all this off your hands—for a fee.

You can also find full details of your responsibilities as an employer on the UK government’s website.

How does a nanny share work?

In a nanny share, you team up with another family and find someone to take care of both sets of children—either in one home or across the two. This means ready-made friends for your kids and can reduce your costs. However, you need a strong three-way relationship so that you can all agree on pay, hours, holiday and other ground rules.

Each family is considered an employer of the nanny, and each must separately pay them at least the national living/minimum wage. You each need to register as an employer with HMRC and set up your own PAYE scheme so you can declare tax and NI on the nanny’s earnings.

The nanny should also have a separate contract with each family. That makes it a lot easier to untangle the relationship when it’s time for one of the families to move on. You’ll each need employer’s liability insurance too.

Something for nothing?

While we’re talking about tax, don’t forget to check whether you are eligible for tax-free child care. This government scheme can effectively give you up to 20% off the cost of child care from an approved provider. Watch out if you are claiming certain benefits though, as you can only receive one or other.

You might also be entitled to 15 or 30 hours of free child care per week for your pre-schooler. There is a handy calculator to work out what you can claim.

When…



Read More: Taxes and responsibilities: Doing your homework on using childcare

2022-11-17 09:43:21

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