Khalid Sadur is the CEO and Managing Director of KMKS Consultancy, a UK-based independent tax consulting company. Khalid has over 20 years of experience working for the ‘Big Four’ accountancy firms as well as FTSE 100 organisations.
Here are Khalid Sadur’s 6 pointers for families when hiring a caregiver and handling taxes:
Employing a care provider to work in your home
Fortunately, childcare costs are not deductible against personal income tax in the UK. Her Majesty’s Revenue & Customs (HMRC) require that any deductible expenses ‘must be incurred wholly and exclusively for the purpose of a trade, profession or vocation.
Expenditure associated with childcare is not considered by HMRC to meet the ‘wholly and exclusively’ definition and, as a result, is not tax deductible.
The UK government provides some assistance for childcare costs through the benefit system and qualifying individuals may be able to claim Child Tax Credit or Working Tax Credit.
Make the right income tax deductions
HMRC consider anyone working in a home to be employed if:
- They are hired to work in the home
- They are not self-employed or paid through an agency (or Care.com)
As a consequence, hiring a caregiver will be considered to be acting as an employer, meaning you will have to ensure that you:
- Deduct the correct amount of Income Tax and National Insurance Contributions on behalf of the employee and pay these to HMRC
- Pay appropriate statutory benefits
Take responsibility for statutory benefits
An employer must ensure and provide the following if hiring an individual to work in their home:
- An employment contract
- Pay slips
- A salary not less than the National Minimum Wage
- Hours not more than the maximum hours allowed per week
If the employee meets eligibility requirements, they are also entitled to the following from the employer:
- Statutory Maternity Pay
- Statutory Sick Pay
- Paid holiday
- Redundancy pay
- A workplace pension
Registering as the employer
The requirement to register as an employer and set up a payroll occurs once a family decides to hire a caregiver in the home. The manner of payment does not impact on this obligation.
As the employer you must also perform the following duty:
- Check that the employee has a legal right to work in the UK
- Obtain employer’s liability insurance
Avoid under the table payments
Any payments to the caregiver (be it cash or otherwise) will need to be accounted for as employment income and the correct deductions will have to be made by the employer for income tax and NICs through an established payroll.
As an employer you will be unable to claim these costs within you own personal tax return since this will not meet HMRC’s ‘wholly and exclusively’ definition.
Consequences of not declaring a carer
Failure to register as an employer or declare income to HMRC may result in interest and penalties charged in addition to paying the original taxed owed.
In more serious cases, there is even the risk of prosecution and imprisonment
The information contained in the above article is general in nature, does not take into account your personal situation and should not be relied upon in place of appropriate professional advice. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a tax accountant.