Benefits in Kind are ‘perks’ or added benefits provided by the employer above and beyond the employee's salary. They are often taxable and must be reported annually to HMRC as part of employee's total earnings.
Benefits in kind offer a good example of why it is important for employers to agree a gross salary with their employees. If a net salary is agreed, then the employer is liable for the tax. If a gross salary is agreed, then it comes out of the employee’s salary. In addition to tax there may also be a Class 1A National Insurance charge of 13.8% of the value of the benefit to be paid - the employer always pays this charge.
*PLEASE NOTE THESE LISTS ARE NOT EXHAUSTIVE.
Once you have decided that you are going to employ somebody in your home it is very important that both parties understand and agree to what is expected from the working relationship. This should be established in a written contract of employment with stated terms and conditions that are signed and adhered to by employer and employee.
Below is a clear guide to establishing a secure contract that will protect both employer and employee.
All employees have a right to receive an employment contract within two months of their start date. Only workers who are exempt from employee status such as independent contractors - for example a self-employed cleaner - do not require a contract of employment.
The relationship between domestic employer and employee is often seen as a closer and more casual relationship than in a commercial employment setting and some people do not see a written contract as necessary. This can cause concern when a legal or contractual issue arises, such as holiday or sick pay or even salary agreements.
When there is no written contract in place the terms will be determined by evidence such as payslips, letters or written/emailed communication. An oral agreement can also be used but for obvious reasons this is hard to establish.
Stafftax provides free contract templates for all our clients. Employment law advice is provided by Stafftax Legal if you wish to adapt the contract for any terms of employment particular to your situation.
We at Stafftax have long been stressing the importance of employers agreeing a gross salary with their staff rather than a net.
When you agree a net salary, you are contractually obliging yourself to pay that amount into your employee's bank account each week/month regardless of other factors. When auto enrolment begins to affect you, you will be responsible for paying the employer contributions and the nanny’s contributions yourself.
At the moment, the contributions are 1% of the nanny’s annual gross salary from the employer, 0.8% from the employee and 0.2% from the government (2% total per annum) however by the end of 2018, the contributions will have risen to 3% from the employer, 4% from the employee and 1% from the government (totalling 8% per annum). If you are still on a net agreement with your nanny you could be paying an 7% on top of her gross salary into the pension pot instead of the required 3%.
The contributions start out fairly small but with the percentage increases it could become very costly if you do not take action to switch from a net to gross salary.
You can speak to a payroll advisor either by calling 020 3137 4407 option 2 or emailing email@example.com.
How do I get general advice about the auto enrolment service?
You can speak to an auto enrolment specialist by calling 020 3137 4573.
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.
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:
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.
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.
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).
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
To give our clients an idea of costs associated with the new Workplace Pension legislation, we wanted to create this blog to outline the current and future Statutory Minimum Contributions from the employer, the employee and the government.
The amounts that the three contributors pay in is different and increases gradually with time. Here is a table of the levels of contributions:
|Present until 30th September 2017||1%||0.8%||0.2%||2%|
|1 October 2017 to 30 September 2018||2%||2.4%||0.6%||5%|
|1 October 2018 onwards||3%||4%||1%||8%|
The contributions are a percentage of the gross salary.
If your employee earns £16,000 per year in your employment, here is a table to demonstrate the contributions associated with the workplace pension year on year:
Present until 30th Sept 2017
|Present until 30th Sept 2017||£128||£160||£32||£320|
|1st Oct 2017 to 30th Sept 2018||£384||£320||£96||£800|
|1st Oct 2018 onwards||£640||£480||£160||£1280|