Tax & Admin

Everything you need to know regarding paying cash in hand to employees

Allison S Robinson | 22 May 2023 | 1 year ago

Paying Cash In Hand to Employees

Paying cash in hand to employees in cash is a legal and legitimate way of paying salaries. There are many benefits of dealing in cash payments for both employers and employees, but caution needs to be taken because there are tax and legal implications if they are done correctly.

Some employers use cash payments as a way to get around certain taxes but this can lead to serious problems later on if you are found to have breached the law either intentionally or inadvertently.

To help everything understand exactly how cash in hand payments work and avoid any future problems, here is our in-depth guide.

Why do some employers like to pay cash in hand to employees?

Employers like to pay cash in hand for all sorts of reasons, both legal and otherwise:

  • Paying cash is often quicker and more convenient, particularly if it is a business with only a few employees or part-time staff who do not require a large payment; or if it is a company that often deals in cash as there will be plenty available to pay staff at the end of the day or week.
  • Some employers have just always paid their employees in cash and so it is easier than making the transition to alternative modern payments. This is sometimes true for small businesses owned and operated by older people.
  • Some employers think that paying cash in hand means they can get away with not having to pay legally required benefits such as holiday and sick pay.
  • Other employers don’t want the tax authorities and government agencies to know about the full extent of their business. They might be paying employees who are not legally allowed to work or they may have other motives such as dodging immigration rules.

Why do some employees prefer cash in hand payment?

There are various reasons why some employees prefer cash in hand payments:

  • Some employees like to be paid in cash rather than by other methods simply because it is a quick and easy way to get their hands on the money they have earned.
  • Some don’t have bank accounts for whatever reason so cash is the only way the employees can be paid.
  • Other employees may only work part-time so prefer to just be paid in cash each shift rather than having to wait until the end of the month for an official payslip and bank payment, especially if they need the money right now.
  • As with some employers, some employees prefer cash payment because they see it as a way to avoid tax. As there is no official record of what they have earned, or that they have earned at all, there is no tax to be paid.
  • Similarly, some people like to be paid in cash so that they can still claim benefits.
It is perfectly legal to pay employees in cash, whether it’s full-time staff or part-time workers. However, there are very strict rules about how you must operate if you do pay cash.

For example, employers have to make sure that the employees understand their legal rights and entitlements before accepting a cash payment as this is where problems can arise. For example, an employer may try to persuade them not to sign on for tax credits or other benefits because they will be paid in cash so don’t need it but this is illegal. Paying staff cash in hand often means more responsibility for employers who will now be responsible for ensuring employees get everything they are legally entitled to such as holiday pay, sick leave and so on.

Employers can use cash payments as a way to avoid paying national insurance contributions (NICs) if they wish but only under very strict conditions or there is the possibility of being fined heavily for doing it wrong. If you do not make deductions from staff members who earn over a certain amount per week, then you must report their earnings through your payroll systems along with any other relevant information about what has been earned.

Employers should also remember that when paying employees in cash means all workers should receive at least the minimum wage for the hours, they have worked. Failure to do so could result in a heavy fine or potentially even more serious financial and legal penalties.

calculating cash in hand payments

What are the tax implications of making cash payments for employers?

In order to pay legally pay employees cash in hand, most employers will usually take care of the PAYE, tax and NI contributions first. This means that employees will receive their net income rather than their gross income. The best way to do this is to deduct the amount you need to pay your employees before giving them their salaries in cash. This will usually involve some or all of the following deductions: PAYE payments, National Insurance contributions, income tax, pension payments and other benefits. If an employer does not take care of these things first then there’s a good chance that they’ll end up being fined or even prosecuted by HMRC.

How can employees legally pay tax and NI contributions on cash earned?

But what happens if the employer has not already taken care of these payments and expects their employees to do it themselves?

In order to pay their own tax and NI contributions, employees will need to register for a Self Assessment tax return. This is basically the same as all other self-employed people who have to do their own annual returns that tell HMRC how much they earned and what taxes were due on it.

This can sometimes be a problem as many people have no idea how to complete the returns or how to submit them. If you are attempting to arrange your own tax payments after being paid in cash, remember that you need to earn over a certain amount before you even become liable to pay taxes. In the UK, as of the 2022/23 tax year, this figure is currently £12,570 a year. This means that if you are paid less than this amount, then you will not be required to pay any taxes at all.

How do employees claim benefits if paid in cash?

Another important consideration for employees when they receive their salary cash in hand is whether they are eligible to claim any benefits. In terms of their employment benefits such as sick pay, maternity leave or holiday pay, this is down to what is agreed in the contract with the employer. Previously anyone in full-time employment was entitled to these benefits, and even those in part-time employment usually received some proportion of them, however “zero-hour” contracts and similar things have now made things more complicated.

In terms of claiming national benefits like access to the NHS or government contributions into the state pension will usually depend on whether the employer or employee has correctly declared the earnings and paid the correct tax and National Insurance contributions.

calculating tax

How can you prove income if you are paid in cash?

There are various times when you will need to prove how much money you have earned. From getting a mortgage to claiming tax back, accurate proof of income is vital. However, if you are paid in cash by your employer, this can be an issue. Of course, if your employer does everything that they are supposed to do and gives you a payslip showing the tax, PAYE, and NI payments made on your behalf, then there is no issue. If you are expected to take care of these, however, then you will need to take this account on any financial records you keep.

Often the best thing to do is to hold onto all of your payslips, bank statements, and other financial records, and get an experienced accountant to take care of things like tax returns, loan applications, or compiling proof of income when seeking a mortgage. While this may seem expensive, it can save a lot of time and hassle and ensure that everything is done correctly.

What happens if you don’t declare cash payments?

If you have been paid in cash by your employer and do not declare this income to the government, then there is a good chance that you will be prosecuted for tax evasion. If it can be proved that an individual has earned over the minimum threshold but does not include their earnings on a self-assessment return or pay any taxes, they could find themselves liable to prosecution.

The penalty if found guilty of tax evasion depends largely on whether the case was dealt with in a Magistrates’ Court or at Crown Court level. In all cases though, individuals who are convicted face fines as well as potential prison sentences for the most serious offences. Read our writeup about government plans to end cash-in-hand tax avoidance.

How do you pay yourself in cash if you are self-employed?

While many employers will pay their employees in cash, the self-employed often face a different situation. While technically you can choose to be paid however and whenever you like as an independent contractor, most people prefer to get money into the bank account they use for business transactions so that it is easier to keep track of expenses or tax liabilities. This is because the majority of small business owners, freelancers, and other self-employed people tend to have separate bank accounts for their personal and business finances.

If this is the case, you may want to consider withdrawing the money in cash from your business account and then paying it into your personal account. This way, you will be able to create a paper trail to show the tax authorities and also ensure that you have an accurate idea of the business’s finances after you have drawn your salary.

How to declare tax if you’re self-employed?

If you are thinking about becoming self-employed, it’s important to consider not only how best to pay yourself but also what is needed to do in terms of paying taxes.

In the UK, self-employed people have a number of options when it comes to taxes. You can either register for self-assessment and submit an annual return where all income is declared, or you can put yourself on PAYE if your business has employees. The latter option requires you to declare your earnings at the end of each tax year (and in some cases multiple times throughout) but means that HMRC will calculate exactly what you owe them based on this information. Many self-employed people and small business owners prefer to do it this way because they find it easier than calculating payments themselves or they are worried about making a mistake and being fined.

working out tax on cash payments

What are the potential penalties for not declaring income?

The penalties for not paying tax vary depending on how much you owe, why you haven’t paid it yet, and whether your evasion was deliberate. While the maximum penalty is a fine of 200% of the amount owed plus unlimited imprisonment time if you are prosecuted at Crown Court level, this is rare for first-time offenders who have simply forgotten to declare their earnings or have made a mistake on their self-assessment tax returns.

In most cases where taxes are unpaid due to non-deliberate errors made by individuals, there will be no charges brought against them as long as they co-operate fully with HMRC to rectify the error.

Final thoughts

If you are an employer who has been paying your employees in cash for any reason, it is crucial to be aware of the tax implications. Not only could this result in a prosecution but also fines and other financial penalties if not carried out correctly or declared on self-assessment returns. While many small business owners find it easier to pay staff members at least part of their salary in cash, you need to maintain accurate records to ensure that everything is above board and accounted for. If you are unsure about the correct method of paying cash in hand to employees, speak to a tax accountant or lawyer who will be able to advise you and ensure that you act within the law.

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