Your nanny looks after your children - but are you looking after her?

Nannies in the UK can't be self-employed because they go to other people's premises at set hours to earn their living. So when parents employ a nanny, they also take on all the legal responsibilities that go with becoming an employer. These include keeping tax records, providing payslips and filing employer tax returns - in short all the paperwork involved in running a PAYE tax scheme.

Here are ten tips for ensuring both you and your nanny get her tax affairs sorted out, fuss-free.

"Total cost of employment can be as much as 50% higher than the net wage under discussion, so it's important to establish the true cost of employment before agreeing a net wage."

1. Registering as an employer
The first thing you need to do is contact your local tax office and register as an employer. This process will bring you a hefty beginner's pack through the post, containing tax and NI tables. Tax and NI payments are made on a quarterly basis to the Inland Revenue and money may need to be put aside for this purpose. When registering, parents are sent a booklet from which payments can be made, although the Inland Revenue will send reminders if payments are late.

2. Net and gross wages
Most nannies (and nanny agencies) agree a net wage with a new employer - yet the total cost of employment includes both the gross wage and an additional Employer's NI contribution. This means that the total cost of employment at current tax and NI rates can be as much as 50% higher than the net wage under discussion, so it's important to establish the true cost of employment before agreeing a net wage.

3. Entering a minefield of employer legislation
In addition to deducting tax and NI, parents will need to be in compliance with a raft of employment legislation, including:

A. The National Minimum Wage (NMW) - £4.45 gross per hour for employees aged 18-21 and £5.35 gross per hour for employees aged 22 and over.

B. The minimum annual paid holiday entitlement - currently four weeks a year, including bank holidays.

C. Sick pay - rates are variable with part refundable by the state.

D. Maternity leave - with 100% refundable by the state.

4. NMW exemptions and allowances
Nannies who live in the family household are exempt from the NMW because by living-in, they get accommodation, food, heating, lighting and other basic living costs paid for. For employers there's a small offset allowance against the NMW for nannies for whom separate accommodation is provided.

5. Running your PAYE scheme
The Inland Revenue offers a Simplified Deduction Scheme for Domestic Employers - which involves slightly less paperwork - but nowadays many domestic employees (including nannies) are paid above the maximum qualifying level for the Simplified Scheme! Tax and NI deductions are made at the same rate irrespective of which scheme is run.

6. Inland Revenue penalties for late payment and late filing
New employers operating a normal PAYE scheme should be aware that there are interest charges of around eight per cent per annum, for late tax and NI payments, as well as stringent penalties of £100 per month for filing your annual return late.

7. Getting to grips with running a PAYE scheme
Since there are three different income tax bands currently in force, as well as separate NI calculations to make and tax tables to master, all this can prove to be a time-consuming and frustrating process - especially when pay has been agreed on a net basis! As an employer you'll also be responsible for administering Statutory Sick Pay, Statutory Maternity Pay (should it arise), student loan repayments and the new Working Families Tax Credit (if applicable) through your employee's payroll.

8. Tax tables
Many parents are often overwhelmed by all the number-crunching involved, unless you have a head for figures. Alternatively you could call the Inland Revenue for help in getting started, or ask you accountant, although few specialise in this sort of work.

9. Inexpensive specialist help is at hand
The alternative is to use an inexpensive specialist payroll service for domestic employers, such as Nannytax which will also provide unlimited advice on all current employment legislation. This is equivalent to having your own personnel and payroll departments at hand. Nannytax will keep all PAYE records for you, send annual returns on your behalf to the Inland Revenue, and send you regular payslips for your nanny and payment slips for your tax and NI liability.

You could also use an accountant to run your PAYE scheme, although anecdotally costs have been shown to be around twice as much.

10. A positive approach will pay dividends
Getting to grips with your nanny's tax is an opportunity to show her that you respect her status as a professional in her field and recognise her rights as an employee. This is especially important in a type of work in which she'll often be quite isolated from the rest of the working world, inside the family home. So prompt attention to these issues can help to generate goodwill and increased loyalty from your employee.