Deciding to employ home help such as a housekeeper, a carer or a domestic couple can seem like a daunting task. Choosing the right person is taxing enough and then there are the responsibilities that go with becoming an employer.
This is a step by step guide to ensure that you feel confident in becoming an employer and best understand how to create valuable relationships between you and your household staff.
Beware the self-employed domestic
We often hear from lots of people who want their home help to be ‘self-employed’ in order to avoid becoming employers and dealing with the tax and National Insurance. Instead the employee will submit tax returns yearly to HMRC and the agreement between them and the home owner is more of a ‘service agreement’.
While this seems like the most convenient and hassle free option in theory, in practice it is often not possible to do it this way.
The HMRC definition for considering a worker as an ‘employee’ is that they:
- have to do the work themselves
- can be told at any time what to do, where to carry out the work or when and how to do it
- work a set amount of hours
- can be moved from task to task
- are paid by the hour, week or month
- can be paid overtime or receive bonus payments
So if your employee works like this, you take on the legal responsibility of becoming their employer.
If your home help says they are self-employed you should ask for proof from HMRC because if this turns out not to be the case the employer will be held responsible and will face back-payment of tax and fines.
To PAYE or not to PAYE?
Once you’ve established that you need to become a domestic employer it’s important that you set up a PAYE (Pay As You Earn) scheme with HMRC. You can either do this yourself where you’ll need to download and use payroll software to produce payslips, and you’ll need to make monthly submissions to HMRC under RTI (real-time information) legislation, or you can outsource your duties to a payroll company or accountant.
You might be tempted to pay cash in hand but this is of course illegal and if HMRC find out, you could face serious fines. It is also unfair on your employee as they will then not be eligible for benefits such as state pension or job seekers allowance when their employment with you comes to an end.
So what about gross / net salaries?
Domestic staff may sometimes wish to discuss their ‘net’ which means their take home pay. It is good for them to know how much they will take home, but you need to know how much you will pay including tax and Employee’s National Insurance, which is their gross salary.
Always agree a gross salary, to protect your costs. Otherwise you could end up paying an unknown amount on top of their net salary depending on their tax position. If they want to discuss net, we can do net to gross and gross to net calculations for you based on a standard tax code, but the gross salary should then be the agreed one as the net may vary if they have a non-standard tax code, a student loan or any other monies payable out of their salaries before tax is deducted (ie a pension).
New Workplace Pension Legislation
In 2012 the government announced the new ‘automatic enrolment’ workplace pension.
It affected the largest employers first and in the next two years every domestic employer will need to open a scheme will have to make contributions if their employee earns over £10,000 a year and is aged between 22 and state pension age. The employee, employer and the government all make contributions.
Agreeing a gross salary ensures that you will only be paying the employer contributions on top of your current costs. A net agreement would mean you would have to cover your employee’s contributions as well.
New employers will not need to provide a pension until November 2017 at the earliest.
See here for more information on Workplace Pensions