Summary
- Paying workers cash in hand is legal in the UK, but all payments must still be reported to HMRC and subject to tax and National Insurance contributions.
- Employers who fail to declare cash payments risk penalties, back-payment demands, and potential criminal prosecution for tax evasion.
- Both employers and workers share legal obligations regarding accurate record-keeping and proper reporting of all earnings.
- This article is a plain-English guide for UK business owners on the legal requirements surrounding cash-in-hand payments in the workplace.
- It has been prepared by LegalVision, a commercial law firm that specialises in advising clients on employment law and business compliance.
Tips for Businesses
Always record every cash payment made to workers and report earnings accurately through PAYE. Retain payslips and payment records in case of an HMRC audit. Treat cash wages identically to bank transfers for tax purposes. If unsure about your obligations, review HMRC’s employer guidance directly.
Cash-in-hand payments are legal, but compliance is non-negotiable. Employers who pay staff in cash must meet the same tax and reporting obligations as those using any other payment method. This article explores the path of compliance for employers considering or currently using cash payments.
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. Moreover, 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.
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Key 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.
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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.
No. Employees must agree to cash-in-hand payments and understand their gross pay, tax refund processes, and how it affects entitlements like sick pay.
Yes. Employers must report these payments via the Full Payment Submission (FPS) and the final year-end submission.
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