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benefits imageBenefits 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.

Who pays the tax?

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.

Examples of taxable benefits*

  • A car or use of a car for the employee’s own purposes
  • Employee accommodation, if it has a separate front door and separate utilities from the employer’s
  • Medical insurance
  • An interest free loan

Examples of benefits that are tax-free*

  • Use of a car for work purposes
  • Use of a mobile phone (for work and / or private purposes)
  • Personal gifts other than cash that are given for reasons unrelated to the job – ie a wedding or retirement gift
  • Bicycles and cycling safety equipment provided for employees to get to and from work

*PLEASE NOTE THESE LISTS ARE NOT EXHAUSTIVE.

contract resizedOnce 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.

Unsure if you need a contract?

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.

What are the implications if there is no written contract in place?

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.

Employees, even without a binding contract are protected by the following statutory rights:

  • Age appropriate minimum wage (currently £7.20 for over 25s, as at May 2016). This is unless the employee is a live-in employee where the employer pays full room and board. In this instance the minimum wage does not apply.

  • Statutory minimum period of notice

  • After two years of employment, redundancy and unfair dismissal rights

  • The right to Statutory Sick Pay

  • The right to maternity, paternity and shared parental leave/pay if employed for the appropriate amount of time

  • Paid annual leave

  • Protection from discrimination

  • A safe place of work with breaks and rest periods. For nannies or personal carers/assistants where it would be impossible to have a break during working hours as they are looking after dependents the employer must pay for the full day work in lieu of breaks.

What does a contract need to include?

  • The date the employment will commence alongside probationary and notice period. The notice period tends to be shorter for both parties in the first few months of employment and increases over the length of service.

  • Hours of work

  • A clear and concise description of the employees expected duties and tasks of employment

  • Starting salary – we would always advise agreeing a gross salary with any employee

  • The employer’s agreement to operate a PAYE scheme and pay the tax and NI due on the employee’s behalf

  • Holiday entitlement (the statutory minimum for a full time employee is 28 days including bank holidays). The contract may also include a clause stipulating who chooses the holiday. The standard for domestic employees is that the employer picks 10 days and the employee picks 10 days + the 8 bank holidays.

  • Sickness and maternity leave and any other leave that covers at least the statutory amounts

  • Grievance and disciplinary procedure

  • A contract may also cover privacy/confidentiality clauses regarding the employer and their family.

 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.

ST chair and deskWe at Stafftax have long been stressing the importance of employers agreeing a gross salary with their staff rather than a net. 

How does a net salary affect my auto enrolment costs?

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.

How do I switch?

You can speak to a payroll advisor either by calling 020 3137 4407 option 2 or emailing info@stafftax.co.uk.

How do I get general advice about the auto enrolment service?

You can speak to an auto enrolment specialist by calling 020 3137 4573.

payslip croppedDeciding 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

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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:

Dates Employer Employee Government Total
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.

Example

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

Dates Employee Contribution
(per annum)
Employer Contribution
(per annum)
Government Contribution
(per annum)
Total
Contributions
 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
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