Accepting cash in hand work? If yes, then you should know how you’ll be taxed on it. The taxes will be based on your circumstances, for instance, whether you are a registered self-employed person or have a job.

This blog will explain how HMRC reviews cash-in-hand work and what you must do in the most common situations.

Are you having trouble registering as a self-employed person? We’ll get your self-employed business up and running at low cost and less time. So fill out this form right now to save time & money!

What Exactly Is a Cash In Hand Work Payment?

It refers to the payments, where an employer pays an employee or a contractor directly in cash, rather than through e-transfers or bank deposits. While the act of paying is not illegal, it can become problematic if it is used to avoid taxes and National Insurance Contributions (NICs), which adds up to tax evasion and is illegal.

This method is used in industries like hospitality, construction, home care and domestic services as it can be used to pay daily or weekly wages to workers. But they must comply with HMRC’s PAYE regulations.

Is Cash In Hand Work Illegal?

The act of being paid in cash itself is not illegal in the UK. However, it becomes illegal when the income is not declared to HMRC to avoid paying taxes and National Insurance contributions.

For cash in hand work to be legal, both employees and employers must meet their tax obligations.

• For employees: If the employer doesn’t use PAYE, the employee must register as self-employed with HMRC if they are self-employed. They must report cash earnings via Self Assessment.
• For employers: Businesses that pay cash must record the payments, provide payslips detailing deductions for tax and National Insurance, and pay those deductions to HMRC. Additionally, all employers must submit RTI reports to HMRC every time employees are paid.

HMRC Side Hustle Crackdown

In recent years, HMRC has been cracking down on individuals receiving cash in hand work payments as part of their side hustles. This HMRC side hustle crackdown is focused on ensuring that all income is properly declared to avoid tax evasion.

If you are earning money through a side hustle, even if it’s cash in hand work, it must be reported to HMRC. Failing to declare this income can lead to significant penalties and fines.

Benefits Of Cash In Hand Work Payments

Cash in hand work payments include several benefits, some of which are described below:

For Individuals

• Cash in hand work transactions carry a lower risk of data breaches and help identify fraud compared to digital payments, as there is no risk of check bounce.
• They do not leave a digital trail, thus helping in more privacy and security compared to electronic payments. Note: Privacy does not exempt workers or businesses from keeping proper records or declaring income to HMRC.
• They are straightforward, eliminating the need for complex electronic systems and avoiding the frustration of system crashes and internet or server connectivity issues.

For Businesses

• Businesses have an advantage in this way, that can avoid high transaction costs charged by card issuers and banks, especially for smaller transactions by accepting cash payments.
• Cash can help provide a backup for electronic payment systems, as it works even during blackouts or power outages or when the digital networks are down.
• This can also help in immediate cash flows, where businesses can receive instant access to funds through cash transactions, and can be used for immediate operational needs.

Disclaimer: These benefits relate to the medium of exchange (physical currency) and not the legality of payment for work. All income earned must still be declared to HMRC in the UK, regardless of whether it is paid by bank transfer or in cash, to comply with tax laws.

Drawbacks Of Cash In Hand Work Payments

Cash in hand work payments have various drawbacks or limitations, which can arise due to various reasons, like:

Legal Risks

If proper documentation is not done, cash in hand work payments could lead to tax compliance issues and various legal consequences.

Lack of Tracking

Physical cash payments do not automatically create digital records like card transactions, making them difficult to track. Moreover, it might lead to human error, making it harder to prove income to HMRC.

Tax Compliance and Legal Issues

It is illegal to fail to declare income to the tax authorities, including cash income. This can result in heavy penalties, fines and even imprisonment for individuals.

What are Your Responsibilities When You Pay Your Employees Cash in Hand?

When you are paying your employee cash in hand work in the UK, you remain responsible for deducting and remitting Income Tax and NICs through the PAYE system to the HMRC.

Failure to comply with these responsibilities can result in heavy fines, penalties and legal consequences for non-compliance. The following are your responsibilities as an employer:

• Report To The HMRC

You must ensure to submit accurate and timely returns to the HMRC, reporting your employee’s earnings and the deductions made through PAYE.

• Providing Payslips

Employees are entitled legally to a detailed payslip with every payment, whether it is cash or through bank transfer.

• Complying With Minimum Wage Laws

As an employer, you must ensure that the gross pay for all working hours meets the National Minimum Wage requirements.

• Meeting Statutory Entitlements

You must remain responsible for paying the employees statutory benefits, statutory sick pay or maternity pay.

Can An Employer Get Into Trouble For Paying Cash In Hand?

Yes, an employer can get into serious trouble for paying cash in hand, if they are doing it to avoid declaring income and paying taxes, this constitutes tax evasion.

This can include failing to deduct tax and National Insurance through PAYE, failing to report these payments to the HMRC and paying less than the National Minimum Wage.

Penalties can be either heavy fines or prosecution and imprisonment, and employees may lose important employment rights and benefits. There are various reasons for legal trouble which can arise, and the consequences for the employers and employees are explained in detail below:

Reasons For Legal Trouble

• It is illegal for employers to pay employees in cash to avoid their PAYE obligations, which involves deducting their income tax and NICs, from wages and paying them to the HMRC.
• Not reporting to the HMRC, is a serious offence which can lead to tax evasion accusations and severe financial penalties.
• Paying in cash can sometimes be a way for employers to underpay ages, potentially failing below the legally required National Minimum Wage or National Living Wage.

Consequences for Employers

• Employers can face heavy fines or financial penalties for tax evasion.
• In serious scenarios, employers can face criminal charges, most probably leading to imprisonment.
• Any businesses caught in evasion of tax may be at risk of losing their license or industry accreditations.

Consequences for Employees

• Employees who are paid in cash without proper documentation may lose access to employment rights like statutory sick pay, maternity pay and redundancy pay.
• Difficulty can arise in proving income, without a clear record of payment, when applying for loans, mortgages or other financial products.
• Employees are responsible for paying their own taxes and NICs on cash in hand work earnings if the employer fails to do so.

Steps To Legally Pay Employees In Cash

Legally paying an employee in cash in the UK involves steps like registering for PAYE with the HMRC, recording accurate hours worked, and providing detailed payslips. The employee must be informed of their rights, including the difference between gross and net pay.

• Register for PAYE with HMRC for all employees, if they are paid 96 pounds/week or more, have another job, receive any kind of pension or get any employee benefits.
• Keep accurate records of hours worked, including overtime.
• Calculate gross pay and deductions, ensuring compliance with National Living Wage laws.
• Provide payslips detailing gross pay, net income, and tax/NIC deductions.
• Pay the net amount in cash and obtain confirmation of receipt.
• Invest in security measures (e.g., safes) if handling large amounts of cash.
• Ensure pension enrollment for applicable employees.

How Can Your Employees Legally Pay Tax And NICs  On Cash In Hand Work Payments?

It is illegal in the UK to pay an employee’s wages in cash without deducting and paying Income Tax and NICs through PAYE.

For cash in hand work payments to be legal, the employer must operate PAYE and provide a payslip, or the employee must declare the income themselves through Self Assessment.

As An Employee

If your employer pays you in cash but has not deducted tax or National Insurance, you have two legal options:

• You can ask your employer to deduct tax, as they are legally responsible for operating PAYE. They should provide a payslip and account to HMRC for the tax and NICs due on your cash wages.
• If your employer refuses to correct the situation, you can register for Self-Assessment with HMRC to declare the income and pay the taxes and NICs yourself.

As Self-Employed

If you are self-employed, either a contractor or freelancer who legitimately receives cash-in-hand payments, the process is simple:

• Register for Self-Assessment with the HMRC as self-employed to file an annual tax return.
• It is your responsibility to keep accurate records of all the company’s income and expenses, as there is no paper trail from the bank.
• You must file your tax return at the end of the tax year and declare all your cash income.

How Do Employees Claim Benefits If Paid In Cash?

Employees can claim benefits by reporting their earnings and providing proof of income to the relevant government body.

The following steps need to be kept in mind, if you want to claim benefits as an employee:

• As an employee, it is your legal right to request and claim your regular payslip detailing your gross wages, deductions for tax, and National Insurance.
• As there is no automatic paper trail of cash in hand work payments, you must create detailed personal records for yourself.
• For your earnings to be counted towards eligibility for benefits, they must be properly declared and taxed to the HMRC.

What Are the Penalties or Fines for Not Declaring Cash in Hand Work Payments?

If cash in hand work income is not declared in the UK, fines can be up to 200% of the unpaid tax, plus interest. In severe cases of deliberate tax evasion or fraud, criminal prosecution can lead to imprisonment.

Penalties depend on the severity of the non-declaration, ranging from careless errors to deliberate concealment of income from HMRC. The HMRC determines the penalties based on the nature of the non-declaration:

• For careless errors, penalties typically range from 0-30% of the unpaid tax.
• For intentional failing or deliberate evasion to declare income, penalties are higher and range from 20-70% of the unpaid tax.
• In the cases where you actively try to hide the income, penalties can be between 30-100%. For overseas income, this can increase to 200%.

Top Considerations When Making Cash In Hand Work Payments

Making cash-in-hand payments poses certain security risks, like theft or loss and different legal and tax responsibilities, like properly declaring income and contributions to avoid penalties.

For Recipients

• All cash income must be reported to HMRC. Employees typically have tax deducted via PAYE, while the self-employed must declare it on an annual Self Assessment tax return.
• Maintain a record of the payments such as invoices, receipts, and a spreadsheet to avoid penalties and prove your earnings.
• Ensure your employer provides you with a payslip and acknowledges your employment rights, such as holiday pay, sick pay, and pension contributions.

For Employers

• You must adhere to all legal obligations, including reporting earnings and paying NICs and tax to HMRC for employees.
• Implement security measures for handling and storing large amounts of cash to prevent theft or loss.
• Ensure transparency with employees about the tax implications of cash in hand work payments and the importance of declaring their full income

Bottom Line

Cash in hand work payments are not illegal in the UK, but failing to declare and pay taxes on them can be. Employers must ensure PAYE tax and NICs are deducted, provide payslips, and uphold employment rights. Employees must also report earnings to HMRC if required.

While you can earn up to £1,000 under the trading allowance without notifying HMRC, any earnings above this threshold must be reported.

We provide incredible accounting and taxation services that include professional support for self-employed individuals & casual earners! We will gather information from you and will register you to HMRC on your behalf and reduce all your business problems in no time! Contact us now!

Disclaimer: This blog contains general information about Cash in Hand Work.