There are a lot of myths around paying employees in cash, including the belief that as long as there is a manual record of a cash wage, there is no need to worry about payroll compliance or that cash payments are not taxed in the same way. Both of these beliefs are wrong, and failure to properly report cash payments can result in an HMRC investigation into your finances, penalties and fines, backdated payments and sometimes even criminal prosecutions.
How to Pay in Cash
You can pay your employees in cash as long as you follow the correct payroll procedures. This means you just operate PAYE and deduct taxes. Deductions include income tax, employee national insurance contributions and employer NICs. If applicable, you should also deduct student loan repayments and workplace pension contributions. This information should be submitted to HMRC via Real Time Information in the same way you would submit bank transfer information.
You must also provide the employees with payslips that show their gross pay, net pay and any deductions.
If you are struggling with a payroll system, an accountant can help. Find one in your area with a relevant internet search. For example, you could search for Worcester accountants if you are based in that area, and you will get results such as www.randall-payne.co.uk/services/accountancy/worcester-accountants/. Paying for professional accounting services is an investment well worth making to keep on the right side of the law.
Legal Requirements
Paying in cash still means meeting the required rates for the National Minimum Wage and the National Living Wage. If you are paying in cash, HMRC tends to be extra vigilant in checking this.
You must also make sure your records of payments are accurate and kept for at least three years. If the records are not kept, it will look to HMRC as if you haven’t been paying enough tax, regardless of whether this is actually the case. All wages, regardless of how they are paid, must be processed through the payroll system, reflected in tax filings and reported accurately to HMRC.
