Is paying cash in hand illegal? The ultimate guide

Learn the rules for businesses that use cash in hand to pay for wages, products and services, including the legalities, pros and cons, and potential penalties.

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The UK may be becoming increasingly cashless, but it is legal for a business to use cash to pay staff and suppliers – and for businesses to accept cash in hand payments – so long as the payment is recorded and reported, and that any tax and National Insurance (NI) payments due are paid.

Paying wages or for products and services with cash offers some benefits for startups, but the rules for doing so are complex. It is vital that businesses understand how to apply them to cash payments in order to comply with HMRC and avoid penalties and fines.

Below, you will find out what cash in hand is, and understand the legalities of paying with cash, the penalties for paying with cash non-compliantly, the pros and cons of using cash, and how to pay employees and for products and services legally using cash.

What is cash in hand?

Cash in hand is the process of paying in cash rather than by a form of automatic payment.

For a small business paying staff, it means paying them in cash rather than into their bank via the PAYE system.

Cash in hand payments can also be used to pay for products and services legally. Cash purchases should be recorded and accounted for like any other purchase.

Is it legal to pay cash in hand?

It is legal for businesses to pay staff cash in hand, and to pay for products and services using cash, but payments must not be made simply to reduce the amount of tax, NI, or VAT due to HMRC from the transaction.

An employee must agree to be paid with cash and be made aware of their legal rights and entitlements, including statutory benefits. The rules regarding national minimum wage and national living wage remain valid. It is illegal to underpay an employee just because they are being paid in cash rather than by bank transfer.

As long as a business calculates, declares, and pays the right taxes, cash in hand pay is legal.

Read more: can shops refuse cash payments?

Case study

Markus Schaal, Managing Director & COO at PC gaming company PLITCH, said “On the plus side, you avoid credit card transaction fees. However, if you’re not diligent, cash can lead you to some accounting issues down the line.

“Cash-focused businesses need safeguards: security protocols, detailed accounting, compliant payroll processes, and sound financial controls. Do that upfront and you can make cash work long-term. It’s just about being smart from the start.”

The rules and regulations around paying cash in hand

There are a number of rules to follow and get right when paying in cash, both with regards to paying employees and paying for products and services.

 Paying employee wages in cash

When employees are paid with cash, their rights are exactly the same as when they’re paid electronically, and so employers must:

  • Provide employees with payslips
  • Pay employee pension contributions, holiday pay, sick leave, and other statutory benefits

Income tax, NI, and other relevant taxes must still be paid on cash salaries, either by the employer or the employee via self-assessment (we’ll discuss this in more detail in the section below).

Paying for products and services with cash

If a business pays for products and services using cash, the main legal risk is that, if VAT is due, it must be paid to the supplier and accounted for in the purchasing business’s VAT return.

Paying for products or services using cash is entirely legal as long as the payment is treated the same as it would be using another payment method, i.e. it is recorded, reported, and any tax due is paid.

When a business pays in cash, it must report the transaction to HMRC. If a civilian uses cash to pay a tradesperson or business, they do not have to report the transaction, but the business receiving the cash does.

Case study

Leo Smigel, a personal finance expert and the founder of Analyzing Alpha, explains his experience of accepting cash payments from customers. “Most small businesses start out accepting cash as their main form of payment simply due to limited options and cash flow needs.

“Record keeping is absolutely crucial when dealing with physical money.

“We implemented a robust point-of-sale system at Analyzing Alpha to digitally log every transaction. This allowed us to easily reconcile daily cash totals against our sales records.

“I also recommend maintaining old-fashioned cash receipt books as a backup paper trail. Either way, documentation is key to avoiding audit issues down the road.”

How to pay employees cash in hand legally

Employers should calculate their employee’s gross pay (their total earnings before deductions), then pay the employee’s income tax, NI, and pension contributions before paying the employee the net amount (the legally correct amount after deductions) in cash.

This ensures the employer’s and employees’ cash in hand payments are more likely to be compliant, and that the employee receives the correct statutory benefits.

If the employer does not take care of this and opts to pay the employee their gross wage, it is the employee’s responsibility to register for self-assessment, report their earnings, and pay the tax and NI due. This could happen if the employee normally works as a contractor but for a specific role is treated as an employee. Another scenario when this may apply is if an employee is applying for a mortgage and wants to use their gross pay as a basis for a lender to assess what they will lend.

There are other reporting options for employees to declare cash payments. An employee can ask their employer to enrol them into a voluntary PAYE scheme. This means income tax and NI are deducted from cash payments in a similar way to the PAYE scheme. Employees can also pay Voluntary NICs via self-assessment.

Both employers and employees must keep meticulous and accurate records of all cash payments made and received to accurately record, report, and pay tax, NI, and other deductions. The records can be used as evidence should HMRC ever investigate the business.

How to legally pay for products and services using cash

Businesses can legally use cash to pay for goods and services, but just because the payment method has changed, it doesn’t mean the tax status of the payment has changed.

It is still a transaction that will attract tax in one or more forms. Paying cash in hand does not remove the obligation to record, report, and pay tax on it.

Any business that pays for products and services using cash – and any business or individual who receives cash payments – must declare the payment to HMRC via an annual tax return. HMRC requires a transaction trail to support the reporting of cash payments.

Cash payments can be used to entice customers as they enable you to offer reduced rates – typically because VAT, currently at 20% in the UK, is not added to the bill when it’s paid by cash.

In theory, this would allow a buyer to get the service 20% cheaper, and the seller or provider of the service to be able to be paid in cash without having to declare it and pay tax. However, this is illegal and is classed as tax evasion. If those involved are found guilty, they can be penalised by HMRC.

These scenarios are one reason why cash payments can be viewed with suspicion, and why HMRC regularly investigates them.

However, in many cases the cash payment is made for convenience, to avoid charges, or to utilise cash flow without using credit. This can be beneficial for startup businesses who may reach credit or overdraft limits but still need to facilitate business transactions.

The penalties of using cash in hand non-compliantly

For both employers and employees, there are penalties for not declaring cash payments made or received to HMRC. If found guilty, both could be penalised for tax evasion.

For employees, if it can be proved that they earned enough for tax and NI to be due but did not make payments, they could be liable for prosecution.

When it comes to employers who pay employees by cash, there are three main areas that can get them in trouble:

  • Not deducting tax and NI from employees’ wages
  • Paying employees less than the minimum wage
  • Paying cash in hand to employees who do not have the legal right to work in the UK due to their immigration status

The penalties for businesses are likely to be more severe, because issues are likely to apply to a number of employees, in which case the tax liability would be higher. The penalty will also depend on whether the evasion is deemed to be deliberate. Find out more about late payment penalties for PAYE and NI and for self-assessment.

In most cases, where there is an accidental error or oversight, HMRC won’t prosecute employers or employees as long as they fully cooperate with HMRC to correct the error.

Case study

Conor Hughes, an HR consultant, explains that when working with small businesses, “I’ve noticed that cash payments can really help out with liquidity and flexibility. The instant nature of cash just improves cash flow, so important for any growing company.”

However, Hughes warns that “if you’re getting huge cash payments, be suspicious as it can point to money laundering or tax evasion.

“One of the biggest pitfalls I’ve seen is the temptation to use cash to casually pay employees or cover personal expenses off the books.

“It’s illegal and if audited, the penalties for tax evasion can be massive. I usually suggest integrated payroll solutions that let cash businesses pay workers legally and seamlessly.”

The pros and cons of cash in hand

  • Employees get immediate access to earnings.
  • Some employees don’t have bank accounts, so prefer to be paid by cash.
  • There are no additional administration charges for employers with cash payments.
  • There are no additional administration charges for employers with cash payments.
  • Paying in cash reduces delayed payments due to IT issues, power cuts, and delayed bank transfers.
  • Operating in cash can make it easier for a startup to manage budgets.
  • Operating with cash can increase security risks, including petty theft and robbery.
  • Due to the perception of cash payments being illegal, paying with cash can increase the possibility of being subject to a tax investigation.
  • Digital and electronic payments and transactions create an automatic audit trail. Cash transactions don’t, which can make accurate record keeping more difficult as they need to be manually recorded.
  • The role of cash has declined in society, so although you may want to operate in cash, your trade suppliers and customers may not.

Verdict: Should you pay cash in hand?

For most businesses, operating using card, contactless, or other forms of automated payment is sufficient to cover all business transactions, including staff wages.

However, for a startup, having a facility for making and receiving cash payments provides more options. Paying with or receiving cash can aid liquidity and smooth the cash flow of a company that may not have large credit facilities.

For businesses that serve customers face-to-face, for instance at hospitality events, or where internet connections are crucial, having a cash payment system can be a useful backup in case their digital payment system crashes.

For businesses that employ casual staff, paying wages cash in hand is an option that suits some employees, especially those who don’t have bank accounts.

Overall, businesses can have the facility to pay for and be paid in cash, with two crucial caveats:

  • All cash payments must be recorded and reported, and any tax due on the transaction paid to HMRC
  • Cash payments should never be made as a tax avoidance strategy
Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.

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