What is RTI?
RTI is a new reporting system introduced by HMRC. Historically, dating from the days when most nannies were classed as domestic servants within large households, nannies have been paid a net wage with the employer paying all income tax, employee’s and employer’s National Insurance contributions on top of the agreed wage. This practice has remained the norm in England (although not in Scotland, where normally a gross wage is agreed) and is often reinforced by what the nanny hears from her peers during her training.
However, as of April 2013 HM Revenue and Customs have made a fundamental change to the PAYE system to cope with the restructuring of the benefits system associated with the introduction of “Universal Credit”. This is the biggest change to PAYE in the 60 years the system has been in operation. There are a great number of changes to the way in which PAYE now operates, but some of the most significant changes for employers to note are:
- Every single payment made to an employee must be reported to HMRC via an online process BEFORE the payment reaches the employee.
- The P45 and P46 process has been restructured to fit in with online reporting and HMRC will inform the employer of the tax code to use once the employee has started work rather than this being allocated via a P45. We will have little or no control over the code that HMRC allocate.
- HMRC are implementing a penalty regime, starting in April 2014, where every late or incorrect RTI submission may result in a penalty of £100 being charged to the employer. This means that if an employee starts work in, say, June and is due to be paid at the end of June, unless the employer has applied to set up a PAYE scheme before the second week in June, there will be insufficient time to set things up and send an RTI submission to HM Revenue before the first pay is due. If the RTI submission is sent to HM Revenue after the employee has been paid for the first time, it is likely that a penalty of £100 will be charged to the employer. Do not get caught out – contact us to get things set up in good time!
- Processing weekly pay will incur a substantial extra overhead.
How will RTI affect nanny employers and nanny payroll companies?
As a result of these changes, we believe it is no longer possible for employers to effectively operate net pay agreements for employees. As we will not be able to exercise the same degree of control over tax codes and as all employee pay must be reported accurately to HMRC before it is given to the employee, your agreement with the employee will need to be in gross terms to avoid potentially serious anomalies occurring in individual cases which might then result in HMRC penalties.
Penalties of £100 will be charged to the employer for even minor transgressions or late submissions. In particular, employers MUST supply us with timely information in respect of pay changes, an employee leaving or any other event which affects pay in any specific pay period.
The requirement to change to gross pay will come as a considerable shock to many domestic employees and many employers may have difficulty in explaining the ramifications to them. However, PAYE for Nannies believes that there is no alternative but to make this move as soon as possible and strongly urges all new employers to negotiate pay only in gross terms. We can always provide employers with an indication of the amount of net pay which an employee will receive from a particular amount of gross pay (or vice versa) but must stress that this depends on the employee having a clearly defined tax code and that pay amounts never vary during the tax year. Please note – it is very important that you tell your employee that any figures are only an indication and that you cannot GUARANTEE a particular amount of net pay will always result from a fixed amount of gross pay.
- Only negotiate pay in gross terms
- Do not promise that a particular amount of net pay will always be paid for each pay period.
- Do not put net pay (or both net and gross pay) in a contract which may remain in effect after April 2013. We recommend that all contracts should state pay in exclusively gross terms, other than in a few very specific circumstances where using net pay for a short initial period may be to the employer’s financial benefit.
- Do everything possible to encourage an employee to accept monthly pay from the start. If this is not possible, try to transition pay over the period up to April 2013 from weekly to monthly. Weekly pay will become increasingly difficult to administer after April 2013 and time constraints will significantly reduce flexibility to reflect unexpected pay changes in the week they occur. Also you should be aware that charges from all nanny payroll companies are likely to increase substantially for weekly paid employees.
Employers should NOT under any circumstances confirm they will pay a net figure to the nanny and then say something to the effect “but we will put the gross equivalent in the contract” without fully explaining to the nanny that in certain circumstances this will result in a net pay figure which is different to the figure they might expect. If a gross figure is put in the contract then both the employer and the nanny need to realise that any net figure previously mentioned relied on estimates based on average pay and a “normal” tax allowance and tax history at the point the calculation was made. Subsequent calculations of net pay at a later date based on a gross figure defined in the contract will frequently result in a net figure which is very significantly different from the net figure discussed initially (sometimes by more than a hundred pounds). This happens most often in the first or final months of employment but will also happen if the nanny has been off sick, had unpaid leave or worked overtime. Often the net figure will be more than the nanny or employer is expecting but sometimes it will be less.
In cases where the employee has an existing job, the employer should realise that the gross pay which the nanny will need to receive to achieve a particular net amount per hour, week or month will be considerably greater than if the employer was her sole employer. In such cases we suggest the employer calls us for advice BEFORE agreeing to a particular figure with the nanny.