In Autumn last year, the government announced further changes to the tax system to compensate those who lost out the most from the removal of the 10% tax band in April's budget. The changes became effective from the first pay day on or after 7th September 2008.

As a result the personal tax-free allowance increased from £5,435 to £6,035 and so most tax payers received a £120 rebate in 2008. Although the changes came into effect in September, they were back-dated to the start of the tax year (April 2008). This resulted in a £60 lump sum in September's pay packet, followed by a £10 monthly increase until the end of the 08/09 tax year.

Not everyone was fully compensated, since those on the lowest incomes lost as much as £230 per year from the abolition of the 10% tax band and yet only gained £120 from the introduction of the new higher allowances.

Those who benefited the most from the changes were those earning between £13,335 and around £40,000. They gained once from the reduction in the basic rate from 22% to 20% and again from the extra £120.

This government u-turn presents an interesting example of how nannies on net-wage agreements sometimes stand to lose out, since, from a legal point of view, the £120 rebate did not need to be passed on to the nanny unless she was on a gross-wage agreement.

It could of course be argued that nannies on net-wage agreements didn't lose out when the 10% tax band was removed in the first place, since it was the employer who took the hit for that. But nannies on a net salary who had only been employed since the beginning of the 08/09 tax year may not necessarily have seen any of the £120 rebate as it was at the discretion of the employer. Also there was a possibility that nannies who had been employed for longer may have had to forsake a potential payrise as many employers found themselves having to tighten their belts following the removal of the 10% tax band.

Ultimately the best thing to do is to agree a gross wage with your nanny. There are countless drawbacks for both employer and nanny in agreeing a net wage. Have a look at some of the articles in the 'net wage' section to learn more.