Brass tax

Nannies and the parents who employ them will be affected by two important policy announcements in Chancellor Gordon Brown's April Budget speech. They come down to a matter of: do you want the bad news first, or the even worse news?

The one with the most immediate impact on nannies' wages and parents' costs was the 1 per cent increase in both employers' and employees' National Insurance (NI) contributions from April 2003, the start of the next tax year. But the one with possibly greater significance in the long term was the announcement of the creation of a new category of 'home childcarer'. This, subject to earnings criteria, would extend the system of childcare tax credits available for working parents by including credit for some form of government-regulated childcare in the child's own home for the first time. The wider implications of both of these policy announcements have only become clear in the period following the Budget announcements, and both of these issues certainly call for closer scrutiny.

Who pays for NI?

The National Insurance increases have attracted attention in the national press, being described as a 'triple blow to families with nannies' (Sunday Times) or a 'triple whammy of tax rises' (Financial Times). This is because parents who have agreed a fixed net wage with their nanny will have to pay not only their Employee's NI increase as well as their Employer's NI increase, but will also be paying an NI increase on their own gross salary if they are an employee themselves.

Of course this underlines yet again how inappropriate it is for parents to be agreeing to pay a fixed net wage and, indeed, for nannies and nanny agencies to be asking for a wage to be agreed on a net basis. The UK tax system runs on a gross wage basis, from which tax and NI deductions are made to arrive at a net (take-home) wage. The convention of agreeing a fixed net wage - which we have frequently criticised - is simply storing up trouble, and unwanted costs, for the employer, as in this instance.

For parents employing a daily nanny in central London and paying the current weekly average net of 344, as revealed in our latest annual nanny salary survey (Professional Nanny, January 2002), the rise in their nanny's gross wage will amount to an extra cost of 10 a week, or 520 a year. For daily nannies in towns and cities in other parts of the UK, on an average net pay of 236 a week, the employer's increased cost will be 6 a week, or 312 a year.

Net loss

Nannies on agreed net pay will not escape the effects. Even those on net wages whose employers will pay the extra NI for them face the likelihood that the NI increases will lead to a sharp slowdown in rising salary levels for nannies. Parents are unlikely to simply swallow these extra costs without seeking to pass them on in the form of lower pay rises, or no rises at all.

But there is another important issue at stake for nannies. If the increased NI contributions are accepted by most voters in the UK, on the grounds that they are specifically to provide greater funding for the health service, then why should nannies be exempted from making their contribution to the social and political process, like any other employee? As we have pointed out before, net pay arrangements disempower nannies as citizens and delay the day that they enjoy both the benefits - in the shape of past tax cuts (which have not been automatically passed on to them if they are on an agreed net wage) - and the responsibilities of being treated as grown-up members of society.

Home childcare

Moving on to the 'home childcarer' issue, we could be seeing half a policy in search of its other half. The Department of Education has announced that it will soon issue a consultation document on this subject, with a view to finalising procedures for implementing it by April 2004. At the same time the education minister, Estelle Morris, welcomed the fact that eligibility for childcare tax credits would be extended, from care by nurseries and childminders, to some forms of childcare in the home for the first time - especially to help parents working unsociable hours and those with disabled children.

But the provisions, as announced so far, only apply to childcare for children aged over seven, and only parents with joint (or total) incomes up to Pounds 58,000 a year would qualify for the tax credit. The early response in the press suggested that this policy might benefit parents employing a nanny. The Times ran an article headed 'Tax credit may herald subsidy for nannies', which noted that the policy had a mechanism for including registered childcarers but excluding nannies. It said, 'In the long term the move is bound substantially to increase pressure on the Government for nannies to be included.' But will it?

Why leave out nannies?

Perhaps the first question that should be asked is why the Government's policy appears specifically designed to exclude nannies. There are two possible reasons. The first is that the Government is bending over backwards not to be seen to be helping a group of parents - nanny employers - who are already considered to be privileged by the majority of voters. The second is that they think that the cost of employing a nanny is not a serious financial issue for higher-earning parents. Although the first reason might be a vote-winner for the Government, the truth is that, with nannies' wages higher than they have ever been - even before these latest NI increases - higher-earning professional working mothers are receiving no encouragement whatsoever to be able to afford to return to the workforce. On the contrary, they are finding themselves faced with increasingly costly choices.

This runs directly counter to the Government's stated aims to make childcare more affordable for all parents, and to encourage more of an enterprise culture as a way of creating future wealth for the entire economy. While it is understandable for childcare policy to be mainly geared towards lower-earning mothers who want to get back into work, it is surely a case of the Government shooting themselves in the foot by having such a shortsighted policy towards more skilled professional mothers - the very entrepreneurs and high-fliers whom the Chancellor says he wants to encourage. It is a mistake to assume that a higher-earning mother working long hours can easily afford a nanny at current wage rates, when this would, on average, involve 35,000 of her own gross income simply to cover the cost of employing a daily nanny in central London.

Back to the register

Taking on a regulated and approved person for childcare in their home appears to be what parents would have to do to qualify for a childcare subsidy in the form of tax credits. So this situation should be seen as a golden opportunity by organisations that represent nannies' interests to put the issue of registration or regulation fairly and squarely on the Government's agenda, once and for all.

The Government's policy so far appears to attempt to skirt around this issue altogether. But only by embracing the role of nannies within the childcare workforce, rather than consigning them to a separate, unregulated and unsubsidised sector of their own, will the UK have a coherent and consistent policy on childcare to benefit the nation.

Negative rebound

If nannies in parts of the UK where salaries are not so high feel pressured into reclassifying themselves as self-employed 'home childcarers', then the Treasury will lose a substantial amount of revenue in income tax and National Insurance contributions from parents on behalf of the nannies they employ. At the same time, by continuing to exclude nannies from the childcare tax credit system, the Government risks losing yet more tax income by driving nanny employers back into the black market of cash-in-hand and undeclared earnings -from which so many nannies have only recently emerged.

This is an important issue, and nannies should be aware of its implications. Apart from it now being a more serious, and criminal, offence for parents not to declare an employee's earnings, nannies are left without any NI contribution record in the state benefits system. This means that they are disempowered in another way, living in society as economic non-persons without a safety net if adverse circumstances come along. Nor can they take out a loan or a mortgage, for which proof of their earnings, in the form of payslips, is required.

By excluding nannies from their regulatory and childcare subsidy policies, the Government is throwing them back on the mercy of employers who are not necessarily all caring, honest or conscientious.

Fresh debate

It seems likely that only by integrating nannies within their overall childcare strategy will the Government start to achieve the flexibility and fairness which parents are looking for when trying to fill their particular childcare needs, as well safeguarding the rights of the nannies they employ. Perhaps this new half-policy, with all its flaws, will trigger a more focused debate that might help to achieve this goal.

Stephen Vahrman is the proprietor of the payroll service Nannytax