Paying Employees Cash-In-Hand – Is It Legal?

When it comes to paying your employees in cash, there can be a certain stigma attached to it, leading many business owners to question its legality. The truth is, paying cash in hand is a legitimate way to ensure your employees are paid promptly and is completely legal. However, it is important to handle it correctly to avoid any issues with tax implications. In fact, the UK government even provides advice on paying employees cash in hand, making it an acceptable method of payment.

Benefits of Paying Cash In Hand to Employees

You may be wondering when paying cash in hand could be beneficial to you as a business owner. RealBusiness looked at some common benefits of paying cash in hand:


For businesses that frequently deal with cash, paying employees in cash can be more convenient. This could apply to industries such as hospitality, hairdressing, retail, mechanics, plumbing services, electricians, and many more. However, it is important to note that cash in hand payments may not be suitable for all businesses and employees, and it should be a mutually agreed arrangement between the employer and employee.

Straightforward Process

For small businesses with a small number of employees, paying cash in hand can be a simple and straightforward process. Some business owners may find it more complicated to transition to a more modern payroll system like PAYE (Pay As You Earn). However, as the number of employees increases, it becomes increasingly challenging to keep track of cash payments, making automated salary systems like PAYE more suitable for larger businesses.

Not all Employees Have Bank Accounts

It is worth considering that not all employees handle their finances in the same way. Some individuals may not have a bank account by choice. As an employer, it is important to be flexible and adapt to your employees’ individual needs. Understanding how cash in hand payments work is crucial for all business owners to accommodate such situations.

Flexible Work Options

Many businesses and employees prefer working with flexible arrangements. This could be applicable in scenarios such as seasonal work or businesses that experience fluctuations in demand during specific periods. Paying cash in hand allows for greater flexibility for both the employer and employees. It provides immediate access to earned income, which can be an attractive prospect for employees.

Considerations when Paying Cash In Hand to Employees

While paying cash in hand is legal, it does not exempt business owners from complying with workplace laws and rules. Here are some important considerations:

Employee Rights and Entitlements

It is essential to ensure that employees understand their rights and entitlements. Employers must inform employees that they have options other than cash in hand, and all their rights and benefits, including holiday pay, sick pay, maternity/paternity pay, and bonuses, should still be provided. Employers need to communicate this information effectively to their employees.

Strict Record-keeping

Maintaining accurate records is crucial when paying cash in hand. All payments to employees must be carefully monitored to ensure correct national insurance contributions and taxes are paid. Detailed records provide evidence of compliance with tax and employment laws.

National Minimum Wage

Paying cash in hand does not exempt employers from paying the national minimum wage. Employers must ensure that all employees receive at least the minimum wage. It is also acceptable to pay employees more than the minimum wage.

Tax Implications of Paying Cash In Hand

When paying cash in hand, employers are still responsible for paying national insurance contributions and taxes, just as they would with a traditional payroll system like PAYE. There are two common approaches to handling these payments:

Deduction from Gross Pay

The employer can deduct the relevant contributions, such as income tax, national insurance, pension, and PAYE payments, from the employee’s gross pay before paying them in cash. It is essential to explain this process to the employee to ensure they understand how their pay is calculated and the deductions made.

Gross Pay without Deductions

Alternatively, the employer can decide to pay the employee their gross pay, without deducting taxes and contributions. In this case, the responsibility for paying national insurance and income tax falls onto the employee. The employer should guide the employee on their responsibility to register for an assessment, file their tax return, and pay their taxes and national insurance. Accurate records must be maintained to avoid penalties from HMRC.

Reporting Cash in Hand Payments

Employers must report all employee payments, including cash in hand, to HMRC when completing their usual Full Payment Submission (FPS) and final submission at the end of the year. The reporting should provide details about how employees are paid, whether in cash or through traditional payroll systems such as PAYE. Cash-in-hand employees should be treated the same as other employees, and all necessary information should be accurately reported to HMRC.

Penalties for Non-compliance

Attempting to avoid tax and national insurance contributions by not reporting cash-in-hand payments is fraud and is taken very seriously by HMRC. Penalties for deliberate non-compliance can be severe and may lead to hefty fines and penalties. It is important for employers to fulfill their reporting obligations to HMRC and follow all relevant laws and regulations.

Cash in Hand vs. PAYE

While paying cash in hand can be a legitimate option for some businesses, it may not be suitable for all. Larger businesses with more employees may find it challenging to manage cash payments effectively. In such cases, a payroll system like PAYE can automate processes and ensure compliance with employment and tax laws. Deciding which method is best for your business depends on its unique circumstances and requirements.


In conclusion, paying employees cash in hand is legal and can work for certain businesses. However, employers must provide all necessary information to employees and ensure compliance with employment and tax laws. Employees should be aware of their rights and entitlements, including the national minimum wage. Maintaining accurate records and reporting cash in hand payments to HMRC is essential. Ultimately, paying cash in hand should be a well-informed decision that aligns with the needs of both employers and employees.