Can a Small Business Pay Employees Cash?

Running a small business comes with many questions with regards to the tax man and doing the right thing. One area which new business owners often question is how cash is handled and how that works in relation to paying employees and casual workers.

This guide explains whether and how your small business can pay people in cash. But before we get into the detail, it’s necessary to understand that there are three main types of employment status under employment law.

• Worker
• Employee
• Self-employed

With there being so many rules and different employment statuses, this may lead you to wonder what their rights are in relation to an employee and fundamentally ask whether it’s legal to pay employees in cash.

Can a small business pay employees cash? Yes, it is legal for small business to pay employees in cash. How you make payment to employees is up to you, whether by bank transfer, cheque, or cash.  The key thing is that it is paid net of any tax and NI deductions applicable i.e., it has been run through the payroll. 

It is vital to understand what your duties are in relation to employing people and paying them in cash, including casual workers (who also need to be on payroll).

Employment rules exist in the UK to protect both employees and employers. They have been conditioned over the years to try and make the relationship fair to both parties. 

As an employer not following the rules and regulations can lead to damage to your business on several fronts reputational damage, financial damage, and ongoing staff relationships.

It is very important to get the basics right in your business.

How much can you pay someone before putting them on payroll

You usually pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

You do not need to pay self-employed workers through PAYE.

How much can you earn being self-employed?

If your income is less than £1,000, you don’t need to declare it. If your income is more than £1,000, you’ll need to register with HMRC and fill in a Self-Assessment Tax Return. However, it’s important to remember that if you claim this allowance, you can’t deduct business expenses.

Check out our guide which explains whether a small business can do their own taxes for more information on how this works. 

Can I pay casual workers cash? 

Your small business can pay casual workers in cash as it’s perfectly legal to do so. How you make the payment to the casual worker is up to you, whether it be by bank transfer, cheque, or cash.  The key thing is that it is paid net of any tax and NI deductions applicable i.e., it has been run through the payroll.

If you are attempting to pay casual workers cash as a means of circumventing the tax system, then you are not complying with the law – and this could prompt an investigation by HMRC.

If you operate a cash business for example it would be perfectly legitimate for your small business to pay employees out of cash takings to avoid bank fees when banking cash, provided you have complied with the tax and NI obligations.

More on paying employees in cash

You usually must pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

You do not need to pay self-employed workers through PAYE.

As a rule, someone is:

• employed if they work for you and do not have any of the risks associated with running a business
• self-employed if they run their own business and are responsible for its success or failure

You must check each worker’s employment status to make sure they’re not self-employed. If you get it wrong you may have to pay extra tax, National Insurance, interest, and a penalty.

Temporary or agency workers

You need to operate PAYE on temporary workers that you pay directly if they are classed as an employee.

You do not need to operate PAYE if a worker is paid by an agency, unless the agency is based abroad and does not have either:

• a trading address in the UK
• a representative in the UK

There are special rules for harvest workers or shoot beaters employed for less than 2 weeks.

Employees you only pay once

You operate PAYE differently for employees you only pay once.

Set up a payroll record with their full name and address. If you give them a payroll ID, make sure it’s unique.

When you send your Full Payment Submission (FPS):

• use tax code ‘0T’ on a ‘Week 1’ or ‘Month 1’ basis
• put ‘IO’ in the ‘Pay frequency’ field
• do not put a start or leaving date

Give your employee a statement showing their pay before and after deductions, and the payment date, for example, a payslip or a letter. Do not give them a P45.

It is perfectly legal to make payments to employees via cash.  How you make the payment to employees is up to you, whether it be by bank transfer, cheque, or cash.  The key thing is that it is paid net of any tax and NI deductions applicable i.e., it has been run through the payroll.

How much can you earn cash in hand before paying tax

Employees pay is taxable income, and these employees will be required to pay any tax that may be due.

You usually must pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

The only concession to this is when you pay harvest workers and casual beaters if you employ them for 2 weeks or less, you may not have to deduct tax.

What happens if you get caught working cash in hand? (employers)

As an employer, you normally must operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.

You do not need to register for PAYE if none of your employees are paid £123 or more a week, get expenses and benefits, have another job, or get a pension. However, you must keep payroll records as evidence that you did not need to set up a PAYE scheme.

Once you are registered as an employer all the staff you employ will need to be registered on the payroll even if they earn below the Lower Earnings Limit.  You cannot choose which employees to have on payroll.

Paying casual workers cash without making the relevant deductions whilst seeming clever could cause a huge problem for your business.  If you are caught by HMRC they can take the amount you have paid as being the net payment and gross it up for tax and NI contributions.  

The business owner is liable for anything that should have been paid to HMRC.  Plus the potential of penalties and interest.

Example

The business owner agrees to pay a casual worker £100 per day and they worked 5 days.

Assuming they were a basic rate taxpayer the PAYE would be £77 (£625-£242 x 20%)

The employee national insurance would be £53 (£625-£242 x 13.8%)

The employer’s national insurance would be £58 (£625-£242 x 15.05%)

The total was £688 and an amount owing to HMRC of £188 (38% of £500) for one person for one week.

You can imagine the amount of damage that would do to a small business if this happened over a period of time.

What happens if you get caught working cash in hand? (employees)

Employees who accept cash-in-hand payments risk losing employment rights such as Statutory Maternity Pay and Statutory Sick Pay and could be called upon to pay the back-dated Tax and National Insurance Contributions.

In reality, it is normally the employer who would be called upon to make good any undeclared tax and national insurance. The amount that has been paid is deemed as the net payment and grossed up to calculate tax and national insurance that would have been due.

From an employee’s point of view, you need to consider what you are forgoing working for cash in hand. As an employee, you are losing your employment rights.

Workers are entitled to certain employment rights, including:

• getting the National Minimum Wage
• protection against unlawful deductions from wages
• the statutory minimum level of paid holiday
• the statutory minimum length of rest breaks
• to work no more than 48 hours on average per week or to opt out of this right if they choose
• protection against unlawful discrimination
• protection for ‘whistleblowers’ who report wrongdoing in the workplace
• not to be treated less favourably if they work part-time

They may also be entitled to:

• Statutory Sick Pay
• Statutory Maternity Pay
• Statutory Paternity Pay
• Statutory Adoption Pay
• Shared Parental Pay

Working cash-in-hand you are not entitled to:

• minimum notice periods if their employment will be ending, for example, if an employer is dismissing them
• protection against unfair dismissal
• the right to request flexible working
• time off for emergencies
• Statutory Redundancy Pay

What happens if you get caught working cash in hand? It will not be a pleasant experience but truthfully you are probably losing more than you are gaining. 

You are not doing yourself any favours. If you find yourself in this position, you have to be honest with yourself and ask who you are doing it for. The only benefactor is the employer and only if they don’t get caught.

For example, being paid cash-in-hand means you will not be paying your national insurance contributions towards your pension entitlement. It is very short-sighted.

There are only two certainties in life, death, and taxes. We all need to do our bit.

Conclusion

The rights of employees are there to protect them. 

That doesn’t mean your small business can’t pay employees cash though.

However, if your small business is paying employees in cash as a way of circumventing those rights can lead to big problems for the employer.

You must also adhere to your rights and obligations to HMRC in relation to reporting and paying the correct amounts of PAYE and National Insurance through running a payroll. 

If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue. The potential lost revenue is an additional amount of tax which is due or payable because of correcting the inaccuracy.

For example, if:

• a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
• the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
• the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due

In the instance of trying to avoid paying the relevant tax and national insurance, this would be deemed tax fraud by HMRC.

The penalties for tax evasion can be financial, criminal and in some instances both.

Most cases of tax fraud and evasion are usually dealt with via HMRC’s civil procedures.

HMRC will only prosecute you for tax evasion if the evidence shows that there has been a criminal offence committed and it is in the public interest.   This is called the 2-stage test for prosecutors.  The evidential test and the public interest test.

One of HMRC’s objectives, when proceeding with prosecutions, is to act as a deterrent that sends a clear message of their zero tolerance of tax evasion, either individual or corporate.

If you’re found guilty of tax evasion, there is a risk of a prison sentence, dependent on the severity of the tax evasion.

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