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It’s the end of the working week, and you hand your employee an envelope containing a wad of crisp, £20 notes. They flash a knowing smile and quickly walk away after pocketing the cash.

But why the secrecy? It’s not actually dodgy to pay your employees cash-in-hand!

Contrary to some very popular myths, it’s perfectly legal to give your employees their salary, or take-home pay, in cash at the end of the week, month, or however often you choose to pay them. However, there are a few conditions you should be aware of. You will also need to understand exactly what take-home pay actually means.

paying employees cash in hand

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What is ‘take-home pay’?

In essence, take-home pay is exactly what it sounds like. It is the amount of money your employees take home following a job, after deductions like tax and National Insurance (NI), regardless of how you pay them.

This is also known as net income, and is different to their gross income (also known as ‘gross pay’), which is the total amount earned on the job before deductions are taken out.

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Why do people think take-home pay in cash is illegal?

The common misconception around cash-in-hand payments is that it is ‘free of tax’, or that no tax has to be paid. However, this isn’t necessarily the case. Whether you make a payment into a bank account, or hand over an envelope of cash, you are legally obligated as an employer to pay your employees’ PAYE (Pay As You Earn) and NI contributions to HMRC.

Some employers, however, may try to save money by paying their employees in cash without bothering to give HMRC the relevant PAYE and NI payments. This avoidance of taxes is the illegal part, not the cash-in-hand approach.

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How do I legally pay employees cash-in-hand?

First of all, your employees need to agree to receiving their net income cash-in-hand, and consent that they completely understand the difference between their take-home pay and their gross income. The easiest way to outline these differences is to provide them with a payslip outlining how much they earned, how much was paid to HMRC in taxes and NI contributions, and how much is left for them to take home. Each payslip should also include their individual PAYE number, and clearly state that they will be paid in cash.

You will also need to explain to your employees:

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Is there anything else?

PAYE and taxes

As we’ve discussed, you still need to legally pay the right amount of tax and NI contributions for each employee that you have, even when paying cash-in-hand.

National Minimum Wage Laws

While it may sound obvious, paying cash-in-hand doesn’t mean that you’re exempt from the National Minimum Wage laws. Remember that the minimum wage rates are revised every year, so you need to keep on top of that and adjust your salaries accordingly.

Employer’s Liability Insurance

If you have any employees, even on a casual or part-time basis, you are legally obliged to hold employer’s liability insurance. This protects you and your business from any compensation claims related to injuries sustained by staff during working hours.

Following these guidelines will ensure that you’re not getting involved in anything dodgy—thought we can’t promise that your employees won’t flash you a smile with every payment.

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