Table of Contents
In Short
- Cash-in-hand payments are legal but must follow strict tax and employment law rules.
- You must deduct and report tax and National Insurance and ensure staff receive payslips and legal entitlements.
- Staff must agree to be paid in cash, and you must treat it as net pay, not gross.
Tips for Businesses
If paying cash in hand, get your employee’s consent and keep clear records. Always deduct and report tax and National Insurance, issue payslips, and pay at least the minimum wage. Make sure staff still receive their full entitlements, like holiday and sick pay and seek legal advice if you are unsure.
In today’s digital age, paying employees in cash might seem outdated. Yet, paying your staff cash in hand is easier for many businesses, especially those operating in cash-heavy sectors. Picture a bustling market stall or a local pub – environments where cash still reigns supreme. In these scenarios, employers and employees might find that cash payments streamline their financial flow. However, this convenience comes with a caveat. While perfectly legal in England and Wales, cash-in-hand payments walk a tightrope between efficiency and potential legal pitfalls. The practice has, unfortunately, gained a reputation as a possible vehicle for tax evasion – a shadow that responsible employers must actively dispel.
This article explores the path of compliance for employers considering or currently using cash payments. Why is this understanding so crucial? Because the consequences of missteps – whether intentional or accidental – can be severe. HMRC takes a dim view of tax irregularities, and ignorance is rarely an accepted defence. So, let us explore how to ensure that your cash payment practices are convenient and fully compliant with the law. After all, in the business world, peace of mind is a currency as valuable as cash.
What is Paying Cash in Hand?
Paying your employees cash in hand is often called guaranteed take-home pay. Essentially, you are paying your employees their take-home pay after you have deducted any Income Tax and National Insurance Contributions in cash.
It is important to note that you can only pay your employees cash in hand if they agree to you doing so. They must be clear on what this means and understand what:
- their gross income is in comparison to their take-home pay;
- the process if they are due a tax refund; and
- the amount you will base any legal entitlements on, such as sick pay.
What are My Responsibilities When I Pay My Employees Cash in Hand?
As an employer choosing to pay your employees cash in hand, you assume many responsibilities. For example, you are responsible for ensuring that your employees know their legal rights before you pay them in cash. Furthermore, you must not mislead your employees. For instance, you must not persuade them that they should not apply for benefits such as tax credits as they get cash-in-hand payments. This could be deemed to be illegal.
In addition, you are responsible for ensuring that your employees receive all they are legally entitled to, which can be associated with pay, such as sick leave and holiday pay.
Payslips
You are also legally required to ensure your employees receive a payslip each time you pay them. This must include:
|
Gross Pay |
This is your employee’s total pay before any deductions are due. |
|
Net Pay | This is your employee’s pay after you have made deductions. |
|
Variable Deductions | This is made to their gross pay, such as tax, student loan, pension contributions and national insurance. |
The payslip should also provide other information such as the hours the employee worked, their tax code, or the duration of time the payslip refers to.
When paying your employees cash in hand, you must still ensure they receive the National Minimum Wage applicable to them.
This factsheet outlines key developments in 2025 affecting workforce management. In particular, the proposed Employment Rights Bill (2024) will drive significant changes, anticipated to start late 2025.
You must also report to HMRC that you are making payments to an employee as cash in hand, free of tax. You should do this when completing your Full Payment Submission (FPS) and through your final submission at the end of the year. Guidance on reporting your payroll information to HMRC can be found here.
Continue reading this article below the formKey Takeaways
While paying your employees cash in hand is legal, strict rules accompany doing so. Firstly, you must get an agreement from your employees before doing so. Furthermore, paying your employees cash in hand creates extra responsibility for you, as you must ensure that you make the relevant income tax and national insurance contributions for your employees before passing them their cash-in-hand salary as their net pay. You must also make sure that your employees correctly receive other employment benefits they are entitled to, such as holiday pay. A failure to do so could lead to serious consequences.
If you need help with paying your employees cash in hand, our experienced employment lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The main risks include inadvertently failing to comply with tax regulations and difficulty in proving payment in case of disputes. Other risks include increased scrutiny from HMRC, and potential penalties if proper procedures are not followed.
Regardless of the payment method, you are legally required to provide itemised payslips to your employees. These should detail gross pay, deductions, and net pay.
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