Everything you need to know regarding 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.
Is it legal to pay cash to employees?
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.
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, 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.
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.