Is it legal to pay employees cash in hand?

Confused about the definition of take home pay? Want to understand the legal position around paying employees cash in hand? Read on to find out more.

• Hiring your first employee
• What are the financial implications of hiring additional staff?

What is take home pay?

Take home pay is the amount left to a worker after tax deductions have been made. It’s also sometimes referred to as net income, whereas total pay before tax or other deductions is known as gross income.

Take home pay calculations are important for all workers, whether employed or self-employed. If you are self-employed or running a business, you should make sure that you have a good idea of your take home pay once you have accounted for the amount you will have to pay to HMRC through Self Assessment.

However, if you pay employees or contractors, you may also have questions about their take home pay – and in particular, about whether or not you can pay them cash in hand.

Paying employees cash in hand – is it legal?

You may wish to pay your employees cash in hand, or to pay them a guaranteed fixed amount of take home pay. This is sometimes referred to as paying ‘free of tax’. It is legal to pay employees in this way, but there are specific legal requirements that you must follow.

First, your employees must agree to being paid in this way before you continue, and they must understand the arrangement. Your employees must understand:

• Their true gross pay, and how it differs from their take home pay
• What happens in the event of a tax refund
• The figure you’ll use to work out statutory entitlements such as sickness or maternity pay

Next, and just as importantly, you must make sure that you make the correct tax calculations. For every payment, you must ensure that you are working out how much in PAYE tax and National Insurance Contributions you owe. In most cases, your payroll software will be able to do this for you automatically.

Remember that you will have to make payments to HMRC regularly as well. Read about tax deadlines for your business.

What are my responsibilities when employing people?

If you are just starting out employing people, it’s important that you are aware of all of your legal obligations as an employer. These include:

Minimum Wage Law

It’s important that you understand and abide by your National Minimum Wage and National Living Wage obligations. remember that the minimum wage rates are revised every year. Read our guide to the National Minimum and Living Wage.

Employers’ liability insurance

If you employ anyone, even on a casual or part-time basis, you are legally obliged to take out employers’ liability insurance. The penalties for failing to do so are stiff, so make sure you’re properly covered.

PAYE taxes

Finally, whether you’re paying cash in hand or conventionally, it’s crucial that you understand your obligations with regard to PAYE.

Do you pay your employees cash in hand? Tell us about it in the comments