While many people are paid electronically, the recent increase in the use of physical money has raised questions about paying employees cash.

Getting paid “cash in hand” certainly has some advantages over bank transfers—there are no bank fees or delays, and there is no chance of running up debt on cards, to name a few.

However, the employer and employee must consider some essential legal, tax, and practical considerations.

Let’s take a look at those obligations in some detail.

What Does “Cash in Hand” Mean?

“Cash in hand” payments refer to wages directly paid to an employee in cash instead of a bank transfer or cheque.

These business transactions occur daily in the construction, hospitality, and domestic work industries.

Many small business owners and consumers may pay cash in hand when buying goods or services, especially from those who are self-employed, such as dog walkers or cleaners. This is perfectly legal, but the income must be declared.

Before proceeding with a “cash in hand” payment, it is essential to consider the responsibility of full disclosure—guaranteeing that the correct amount of tax and National Insurance contributions has been paid and ensuring that employees legally pay tax.

Is Being Paid Cash in Hand Legal?

Yes! Being paid “cash in hand” is legal if the transactions are correctly declared to HMRC, so any tax liabilities are handled.

Making the correct National Insurance contributions and tax payments is essential for accepting cash payments.

While income tax is only levied on earnings above the minimum threshold (£12,750 per year), it is still essential for people receiving cash payments to file an annual tax return. This removes any risk of potential penalties or complications down the line.

If incomes are not correctly declared each tax year and HMRC can prove an individual earns above the national minimum wage, they may face suspected tax evasion. This could result in a sentence of up to seven years!

Employees claiming benefits may also find that this has tax implications for the net amount they should receive.

While there are obligations when an employee receives cash payments, there are many reasons why it could also be a good idea.

Benefits of Cash in Hand Payments for Employees

There are many benefits for employees receiving cash payments – a few are detailed below:

Immediate Access to Funds

“Cash in hand” payments are received instantly, providing employees immediate access to funds.

Employees may also find picking up their pay packet very satisfying at the end of the working week, keeping morale high!

Accessibility and community

Paying cash in person is convenient for employers whose staff may need help opening or accessing bank accounts. This could include migrant workers or those in rural communities. It also avoids the costs of bank transfer fees and other overheads.

Also, some small business owners trying to reduce their overheads will prefer to accept cash rather than card payments. Paying cash in those situations is a way to help small businesses save money by avoiding high fees when accepting electronic payments.

Simplicity and budgeting

Cash payments avoid reliance on electronic payment networks, eliminating the frustration of system crashes and inconvenience when shopping.

Another popular reason cash use has increased, is its role in budgeting. Being less reliant on a bank account to keep track of spending means people can more easily set and adhere to budgets.

With cash, people can only spend what’s in their pockets and can’t get drawn into easy credit problems.

Also, some people don’t like having their spending habit data gathered, which is rife with every electronic payment method.

The Risks of Cash in Hand Payments for Employees

Before agreeing to receive cash payments, employees should consider the following risks:

Tax Evasion

Please declare cash-in-hand payments to ensure an employee’s gross pay is accurately recorded. People caught working cash-based jobs without the proper disclosure will fail to pay taxes at the right level, and there will be legal consequences for tax evasion.

Inconsistent Income Reporting

If HMRC suspects an individual is not reporting their income accurately, it may launch an investigation. This process is detailed and meticulous, and the individual must produce documentation dating back seven years.

Therefore, maintaining and keeping documentation is vital. Correctly calculate payments and pay income tax on time to avoid such an investigation.

Security Risks

Carrying large quantities of cash may lead to security risks for employees. These could range from simply losing the money to petty theft and robbery.

Benefits of Declaring Cash Payments

Legal Employment Rights

Cash payments still entitle employees to all given employment rights. These include protection against unlawful wage deductions, the statutory minimum level of holiday pay, parental pay for maternity and paternity leave, pension payments, and the statutory minimum length of rest breaks.

Employee’s entitlement to employment rights should be the same regardless of pay.

Access to Benefits

Similarly, the right of employees to claim benefits such as universal credit should not be affected by whether they are paid via a cash payment or bank transfer.

Credibility for Loans

Accurate records of payments allow employees to prove their income in future circumstances, such as when applying for a loan, mortgage, or other financial product.

What is the Process for Legally Paying Employees in Cash?

  • Step 1: Small businesses must legally obtain the employee’s consent to be paid in cash and ensure they know their legal rights. Employees must also see the difference between their gross (baseline salary) and net income (take-home pay).
  • Step 2: Provide employees with detailed payslips outlining their gross pay, deductions (such as pension contributions), amount of tax paid, and the net income they’ll receive. Their PAYE reference number should be shown on the payslip.
  • Step 3: Businesses must explain tax and statutory benefits to employees, such as how the tax system works and what can affect statutory benefits such as sick pay.
  • Step 4: Ensure that tax payments and national contributions are correct and that all “cash in hand” payments are made legally.
  • Step 5: The business is responsible for paying employees correctly and fully complying with national living wage laws when calculating gross pay.

What Happens if Cash Payments Aren’t Declared?

Employers and employees who fail to declare cash payments made or received to HMRC face penalties. If found guilty, both could be penalised for tax evasion.

Tax evasion occurs when taxpayers deliberately falsify or omit information in tax returns to reduce their tax liability. This can have some serious penalties.

Employees Failing to Declare Cash Payments

Employees could be liable for prosecution if it can be proven that they earned above the minimum threshold (£12,750) but did not correctly contribute to national insurance payments or tax payments.

However, in most cases, employers will take care of their employees’ tax implications and national insurance contributions. Taxes will be deducted before they pay employees their net rather than gross income.

Employers Failing to Declare Cash Payments

Employers are most likely to be prosecuted for failing to deduct income tax and NI from employees’ wages, paying employees less than the legal minimum wage or paying “cash in hand” to employees who do not have the legal right to work.

The legal implications for businesses will likely be more severe than those for individuals. This is because the issues are likely to apply to multiple employees, which increases the tax liability.

The severity of penalties will depend on whether the tax evasion is deliberate.

It is likely that where an accidental error or oversight occurs, HMRC will only prosecute if the employer or employee fully cooperates to correct the mistakes.

However, if found guilty of tax evasion, convicted individuals face fines and potential prison sentences for more serious offences.

Top Considerations When Making Cash in Hand Payments

  • Transparency: All cash payments should be well-documented, including statutory deductions to an employee’s payslip.
  • Compliance: HMRC guidelines should be reviewed regularly to ensure employers and employees comply with tax and national insurance contributions.
  • Clear policies: All employees should be aware of the deductions from their pay and their responsibility to pay taxes and national insurance.
  • Security: Before making “cash in hand” payments, the implications of handling and storing large amounts of cash should be considered—large quantities of money come with inherent risks.
  • Integration: A payroll provider that can efficiently manage cash payments is essential to paying cash in hand.

Correctly declared cash payments ensure that employees retain their rights and access to entitled benefits while businesses stay within regulatory frameworks.

What is CashTech?

CashTech revolutionises cash management by blending innovative technology with traditional cash handling. It enables businesses to manage cash transactions with the same ease, accuracy, and security as digital payments.

Despite growing digital trends, physical cash remains essential for many consumers, and 56% of organisations foresee cash as a lasting part of their operations.

CashTech simplifies processes like reconciliation, enhances security, and supports diverse currency needs, including regional variations like Scottish banknotes.

PayComplete offers cutting-edge CashTech solutions for businesses that want to bridge the gap between cash and digital payments. Discover how PayComplete can transform your payment processes today.