Mythbusters: Paying Employees in Cash is Fine as Long as I Record It – The Payroll Compliance Trap

Welcome back to our Mythbusters blog series, where we expose common financial misconceptions that could land business owners in serious trouble. At Black & White Accounting, we help businesses stay compliant, tax-efficient, and financially secure—and today, we’re tackling a payroll myth that many employers fall for: “Paying employees in cash is fine as long as I record it.”

Many businesses, particularly in industries like hospitality, construction, and retail, assume that paying staff in cash is completely acceptable as long as they log the payments somewhere. But HMRC takes a much stricter view, and if you don’t follow the rules, you could face penalties, investigations, and even legal action. Let’s set the record straight!

The Myth: “Cash Payments Are Fine if I Write Them Down”

Some employers believe that as long as they keep a manual record of cash wages, they don’t need to worry about payroll compliance. Others assume that cash wages don’t need to be taxed in the same way as bank transfers. Wrong!

Regardless of how you pay your employees, all wages are subject to PAYE (Pay As You Earn) tax, National Insurance contributions (NICs), and other payroll obligations. Paying in cash doesn’t exempt you from these responsibilities!

The Reality: Paying Employees in Cash Still Requires Full Payroll Compliance

Yes, you can pay employees in cash—but only if you follow all the legal payroll processes. Here’s what you must do:

1. Operate PAYE and Deduct Taxes

Even if wages are paid in cash, you must still deduct: ✅ Income Tax ✅ Employee National Insurance Contributions (NICs) ✅ Employer NICs ✅ Student Loan Repayments (if applicable) ✅ Workplace Pension Contributions (if applicable)

You must submit this information to HMRC via Real Time Information (RTI), just as you would with bank transfer payments.

2. Provide Payslips

Employees must receive a payslip showing their gross pay, deductions, and net pay—regardless of whether they’re paid in cash or via bank transfer.

3. Ensure Minimum Wage Compliance

If you’re paying cash wages, HMRC will be extra vigilant in checking that you’re meeting the National Minimum Wage (NMW) or National Living Wage (NLW) rates.

4. Keep Accurate Payroll Records

You must keep payroll records for at least 3 years. If HMRC finds that you haven’t recorded cash payments correctly, they may assume you’ve been avoiding tax—even if you’ve paid employees fairly.

5. Declare Cash Payments to HMRC

Simply “writing down” cash payments in a notebook isn’t enough. All wages must be processed through your payroll system, reported to HMRC, and reflected in tax filings.

The Risks of Getting It Wrong

If you fail to properly report cash payments, HMRC will see it as tax evasion. This can lead to: ❌ Fines & Penalties – HMRC can impose penalties of up to 100% of unpaid tax plus interest. ❌ Backdated Tax Bills – If you haven’t deducted PAYE or NICs correctly, you’ll have to pay the missing amounts—potentially years’ worth of unpaid tax. ❌ HMRC Investigations – If HMRC suspects payroll fraud, they may launch a full tax investigation, scrutinising all your business finances. ❌ Legal Consequences – In serious cases, deliberate tax evasion can lead to criminal prosecution.

How to Pay Employees the Right Way

If you still want to pay employees in cash while staying compliant, follow these best practices:

✅ Use Payroll Software – Systems like Xero, QuickBooks, and Sage ensure correct tax deductions and automatic RTI reporting to HMRC. ✅ Get Payslips Right – Always issue legally compliant payslips showing deductions. ✅ Keep Proper Payroll Records – Store payroll data securely for at least three years. ✅ Work with an Accountant – A professional accountant ensures you remain compliant, avoid costly mistakes, and optimise payroll efficiency.

The Bottom Line: Cash Payments Must Follow Payroll Rules

Paying employees in cash isn’t illegal, but failing to report it correctly is. If you don’t follow HMRC’s strict payroll rules, you could face heavy fines and legal trouble.

Need Payroll Help? We’ve Got You Covered!

At Black & White Accounting, we make payroll stress-free and fully compliant. Whether you pay employees via bank transfer or cash, we ensure everything is properly reported, tax-efficient, and HMRC-approved.

Need expert payroll advice? Get in touch with our team today and avoid the payroll compliance trap!

Stay tuned for more Mythbusters blogs, where we continue to break down financial myths and help businesses like yours thrive with confidence.