Being a childminder is great! You get to be your own boss. That means freedom to work when you choose, set your own rates, and decide how many children to take on and what fun activities to do together. But at the same time, being a childminder is hard! You have to be your own boss. That means an uncertain income, no one to share the burden and lots of rules to comply with.
One aspect you absolutely must get to grips with is the financial side of things. If you make a mistake with your taxes, it could come back to bite you.
What is my legal status as a childminder?
Unlike nannies, childminders do not have an employer. The families you work for are customers of your business. Most childminder operate as sole traders. The rules get more complicated if you choose to set up a limited company instead, and in most cases there’s no real need to do so.
What tax do I need to pay?
As a sole trader, you’re taxed on the profit that your business makes. While companies pay corporation tax, as a self-employed sole trader you just need to pay income tax.
This is calculated based on how much you earn above a certain amount, known as your personal allowance—currently £12,570. You pay 20% (the basic rate) on the next slice of income. Let’s see how this works:
- If you earn £25,000 a year, you will pay nothing on the first £12,570 and 20% on the next £12,430, which puts your tax at £2,486.
- Someone on £15,000 a year will only pay tax on £2,430 of their income, which works out at just £486.
You’ll pay 40% on anything above £50,270 a year, and beyond that there’s a 45% rate for the very highest earners. Note that income tax bands are different if you live in Scotland.
You will also need to pay Class 2 and 4 National Insurance (NI) contributions along with your tax:
- Class 2 contributions for 2022/23 are a flat £3.15 a week for anyone earning more than £6,725 a year.
- Class 4 contributions are charged at 9.73% on profits between £11,909 and £50,270, and 2.73% on anything above that.
How do I work out my profit?
Your profit is the money that you bring in (your revenue) minus your business expenses. It’s really important to keep accurate records throughout the year of everything that you receive and everything you spend on your business. That will make doing your tax return as simple as possible. Having a separate business bank account can also add clarity.
As a sole trader with revenues below £150,000, you can work out your profit on a cash basis. This means that you simply deduct the (eligible) money that you spend on the business during a tax year from the money that you receive—cash in minus cash out. It is a lot more straightforward than traditional accounting and doesn’t require you to use an accountant (although that’s still an option if numbers really aren’t your thing).
Deducting whatever expenses you can means a lower profit figure, and so less tax and NI to pay. There are lots of rules about precisely what expenses are eligible, but HMRC’s guidance for childminders is a great place to start.
When and how do I pay my tax?
The first step is to register for self-assessment. You’ll be provided with a Unique Taxpayer Reference (UTR), which you will need to file a return.
The UK tax year ends on 5 April (because why be logical?). You then have nearly nine months, until the following 31 January, to complete your online self-assessment and pay what you owe. There’s a £100 penalty if you miss this deadline, so make sure you plan well ahead and have all the information you need.
Your self-assessment will generate a tax bill stating what you owe and when you need to pay it by. This might well be in two instalments: one in January and one in July. You’ll have to pay interest if you are late making a payment.
There are a couple of pitfalls to watch out for:
- If you’re used to having your tax and NI deducted automatically as a PAYE employee, it can be a shock to have to pay for an entire year all at once. Make sure you put enough money aside throughout the year to cover your tax bill. We can’t stress this one enough!
- Many self-employed people are also caught out by their first tax bill being bigger than they expected. This is because it usually also includes a “payment on account” towards your bill for the following tax year. Your first bill therefore consists of the full amount owed for year 1, plus 50% of your estimated bill for year 2 (based on what you owe for year 1).
What about VAT?
If—like most childminders—your annual revenues are below £85,000, you don’t have to register for value-added tax (VAT), although you can still choose to do so. Being a VAT-registered business complicates your accounting and paperwork, so most childminders can put this on the “things I don’t need to think about” pile.
Keep thorough records and put enough money aside, got it. Anything else I need to be thinking about?
In the same way that employees aren’t used to having to manage their own tax affairs, the need to set aside and pay your own pension contributions might not be on your radar. But not having an employer contributing alongside you makes it all the more important to be saving for your future.
There are also formalities like liability insurance, Ofsted, risk assessments, policies and first-aid qualifications to contend with. The good news is that once you’ve put these things in place, renewing and updating them should require much less effort. Then you can focus on taking control of your working life and the unique rewards that come from working with small children.