It is entirely legal to pay for work ‘cash in hand’, rather than by card or bank transfer. This includes issuing wages to employees or workers, as well as paying for goods or services provided by self-employed people and other types of businesses.
In certain circumstances, dealing with physical cash may be easier or more convenient. However, whilst paying or receiving cash in hand are not illegal activities, certain rules must be followed to remain on the right side of the law. The required actions depend on the situation.
Here, 1st Formations explains the legalities of paying cash in hand, including the deducting and reporting of tax on cash wages.
Paying employees cash in hand
Paying employees cash in hand is perfectly legal if you adhere to the rules, otherwise you could find yourself unintentionally evading tax or breaching employment law, both of which have serious consequences.
First and foremost, you can only pay an employee cash in hand if they agree to it. You must also ensure that they are aware of their legal rights and entitlements before doing so, including the right to statutory benefits.
Regardless of how you choose to pay your staff, they must receive at least the National Minimum Wage or National Living Wage applicable to them. It is illegal to underpay an employee simply because they are receiving their wages in cash rather than by bank transfer.
You must ensure that every employee receives payslips and all employment rights to which they are entitled, including workplace pension contributions, holiday pay, sick pay, and parental pay and leave. Their rights are exactly the same, regardless of how they are paid.
Deducting and reporting tax on cash wages
As an employer, you are legally responsible for deducting Income Tax and/or National Insurance contributions (NIC) from employees’ wages and then paying these deductions to HMRC. This means that the cash wages your employees receive must be their net income, as opposed to their gross pay.
Employees are required to pay Income Tax and Class 1 NIC on earnings above £12,570 per year (£242 per week; £1,048 per month). This is the limit of the standard Personal Allowance, which is the amount of money a person can earn tax-free in a year.
Additionally, you will have to pay Class 1 employer’s National Insurance contributions on any employees’ wages or salary payments above £175 per week (£758 per month; £9,100 per year).
Most employers pay staff wages (including cash payments) through HMRC’s Pay As You Earn (PAYE) system. If you are required to operate PAYE as part of your payroll, you must report all wages and deductions on or before each payday when you complete your Full Payment Submission (FPS), as well as at the end of the tax year when you file your final submission.
Whilst paying cash in hand may seem like a convenient way to distribute wages, it can cause needless complications. It’s more challenging to keep track of business transactions and tax liabilities when dealing with cash-in-hand payments, so it is easier to make mistakes.
Paying cash in hand for other work or services
It is not uncommon for private consumers and small businesses to pay cash in hand when they buy goods or services from self-employed people or other small businesses – for example, paying a childminder, cleaner, dog walker, or tradesperson.
Again, this is perfectly acceptable and legal, but the cash is still taxable and should be treated exactly the same as money received via any other payment method. Paying cash in hand does not remove the obligation to record, report, and pay tax on it.
This means that anyone who receives cash payments for selling goods or services is legally required to declare such payments in an annual tax return. However, the buyer does not have any reporting obligations to HMRC, unless they are also a business (e.g. a sole trader, limited company, or partnership).
Essentially, it doesn’t matter if you pay or receive cash in hand – it is the paper trail and declaration of such payments that are important.
There are, of course, some individuals who pay or accept cash payments as a way to get discounts on work or to avoid tax. However, more often than not, paying cash in hand is simply due to preference or convenience, or to minimise bank transaction changes from taking card payments.
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Employing staff and running a small business can be difficult enough without the added stress of keeping track of cash-in-hand payments. Whilst it may be a convenient option for some people in certain circumstances, it’s generally safer to make and receive digital payments instead.
By doing so, all relevant parties have accurate, indisputable, and permanent digital records of all payments made or received. This is crucial, whether you are an employee or employer, a self-employed individual or small business owner, or a consumer who has paid for a service.