It’s the end of the working week and you hand your employee an envelope containing a bunch of crisp, £20 notes. They nod, flash you a knowing smile and walk away with a wink.
Why? Well, isn’t paying your employees cash in hand a bit, you know, dodgy?
The truth is, that despite whatever myth you may have heard, it is actually perfectly legal to give their employee their take-home pay in this way, albeit with a few conditions.
Before we get onto what those conditions actually are, however, let’s first look at just what we mean by take-home pay, and why your employees keep winking at you every payday.
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What is ‘take-home pay’?
In essence, take-home pay is exactly what it sounds like. It’s the amount that your employees take home to spend after deductions for tax and National Insurance (NI) have been taken out of their agreed overall pay.
You might also see this referred to as net income. This is different from gross income (or ‘gross pay’), which is the total amount that they earned before deductions are taken out.
So, why do people think it’s illegal to pay take-home pay in cash?
The cash in hand approach is known as paying someone ‘free of tax’ but look: that doesn’t mean no tax has to be paid.
Whether you make a payment into their bank account or hand over that envelope of £20s, as an employer you’re legally obligated to pay your employees’ PAYE (Pay As You Earn) and National Insurance Contributions to HMRC. Some less-than-reputable employers will try to save themselves money by giving employees their take-home pay in cash and simply not bothering to hand over the obligatory PAYE payments.
Still, it’s worth pointing out that it’s the avoiding tax payments is the illegal part, and not the envelope full of £20s.
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What do I have to do if I want to legally pay employees cash in hand?
First things first, you have to ensure that your employees fully agree to receiving their net income in this way, and that they fully understand the difference between their take-home pay and their gross income.
To do this effectively, you should provide them with a payslip which outlines exactly how much they earned, how much went on tax and NI contributions, and how much is left as their take-home pay. The payslip should also include their PAYE reference number and state clearly that they will be paid in cash.
You’ll also need to explain two other very important details to your employees:
- What will happen to any tax refunds on tax you’ve paid on their behalf
- What figure you’ll use to work out statutory payment entitlement for things like sickness and maternity leave.
Just a few things…
Though it may sound obvious, it’s worth pointing out that paying cash in hand doesn’t mean you’re exempt from National Minimum Wage laws. You’ll still need to abide by these laws in just the same way that you’re legally obliged to have employer’s liability insurance, and to ensure that you’re paying the right amount of tax and NI contributions for each employee.
Follow these guidelines, and though we can’t guarantee your employees won’t flash you a wink and a smile, it certainly won’t be because you’re up to anything dodgy.
Do you prefer to pay your employees by cash in hand? What benefits and challenges have you come across in doing so? Let us know in the comments below, or join in the discussion on Facebook and Twitter.
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