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How Tax Works on Cash in Hand Work

Considering accepting cash in hand work? Then you are probably wondering what the tax implications are.  The first thing you need to know is that the exact implications will depend on your personal circumstances. For example, whether you are a student, have a job or are registered as self-employed.

In this guide, I’ll explain how HMRC views cash in hand work and what you need to do in the most common scenarios.  

I’ve updated this post on 5 February 2021

What is Cash In Hand Work?

Cash in hand jobs tends to be short term arrangements with an employer who pays you in cash instead of putting it straight into your bank account or adding you to payroll. These types of jobs tend to be common in certain industries such as construction or cleaning or at certain times of the year like shop assistants at Christmas.

Is it Illegal to be Paid Cash In Hand?

It is not illegal to be paid in cash, and you can be paid for your work in any form. But your earnings, in most cases, must be reported to HMRC in case there is tax to pay by both you and your employer.

When people are employed, they receive a payslip that details gross earnings and contains a tax code, so their employer knows how much income tax and national insurance to deduct. It’s easy, and the employee never needs to think about HMRC and taxes. But when you are paid cash in hand no tax or national insurance has been deducted so it’s down to you to work out whether any should have been.

Do I Need to Tell HMRC about my Cash in Hand Work?

Once you earn more than £1,000 you need to tell HMRC about your cash earnings. Below this threshold, you can take advantage of the trading income allowance which permits UK taxpayers to earn up to £1,000 during a single tax year without telling HMRC about it. It helps to simplify the tax system for people just bumping up their income with things like selling on eBay. The catch is that you must keep a log of how much you have been paid to prove to HMRC that you haven’t earned more than £1,000. You can do that by keeping a spreadsheet with a list of how much you’ve been paid, by who and the date you received it.

Once you earn over £1,000 cash in hand in a tax year you’ll need to let HMRC know about your income even if you’re earning below the personal allowance.

How to Let HMRC Know About Cash In Hand Work

The way you let HMRC know by first deciding whether you have casual earnings or you are self-employed. Casual implies what you are doing is one-off, whereas self-employed means you are probably in it for the long term to build a stable income working for yourself. If you need help deciding whether you are self-employed on not, then read this guide ‘What is Self-Employment.’

Declaring Cash in Hand If You’re Self Employed

If you are self-employed, you’ll need to register and report your earnings to HMRC on a tax return once a year, by the 31 January. You’ll do this in the self-employment section of your return where you need to declare the income and expenses of your business, then paying self-employed tax accordingly.

You can learn more about self-employment in my blog series.’Understanding Self-Employment‘ where I explain more about registration, taxes and accounting for your business.

Declaring Casual Income to HMRC

If you have received casual income you’ll need to report this to HMRC once you get paid more than £1,000. You’ll do this by registering with HMRC to fill in a tax return by completing an SA1 form, which you can find here.

Whether you are self-employed or have casual income, you’ll know your registration with HMRC is complete once you’re issued with a UTR number. Keep hold of this reference number as it is really important and you’ll need it to manage your taxes.

When you fill in your tax return to declare your casual earnings, you’ll need to enter the amount you were paid in the main section of the return in the section for Other UK Income (box 17).

Declaring Cash in Hand Work to HMRC

You are can deduct allowable costs from your income in box 18. That means if you had to buy anything in order to earn the money you made you can claim this as a deduction against your income, just make sure you keep receipts as evidence. For example, if you were a hairdresser and had to buy products. You can’t deduct all expenses though, even if you do feel you paid for them in the course of your job but you can check what you can and can’t claim in this guide to allowable expenses.

How Much Tax Do You Pay?

Income tax is cumulative, meaning the more you earn the more you pay and it depends on all your earnings, not just from cash in hand. So if you have a full-time job, the amount of income tax you pay will be based on your combined income. Here are the current UK income tax rates:

 2021/20222020/2021
Personal Allowance£12,570£12,500
Basic rate 20%£12,571 to £50,270£12,501 to £50,270
Higher rate 40%£50,271 and £150,000£50,001 and £150,000
Additional rate 45%over £150,000over £150,000

Say you earn £20,000 in your full-time job and earn £2,000 casual income, then you will pay tax at 20% on your additional earnings meaning you’ll pay £400. But if you earned £50,000 in your full-time job an additional casual income of £2,000 would be taxed at 40% so you’ll pay £800.

If your cash in hand earnings are classed as self-employed income you may need to pay Class 2 and Class 4 national insurance on your earnings, as well as income tax. There are tax-free amounts you can earn before you start paying national insurance, here are the current rates:

 2021/20222020/2021
Small profits threshold – no NICs below this threshold£6,515£6,475
Class 2 National Insurance£3.05 per week£3.05 per week
 2021/20222020/2021
Small profits threshold – no NICs below this threshold£9,658£9,501
Class 4 National Insurance 9%£50,270£50,000
Class 4 National Insurance 2%over £50,270over £50,000

You’ll need to pay any tax you owe by the 31 January, along with filling in your tax return. There are penalties for missing this deadline and not paying your tax on time, so it’ll help to put all the tax year dates in your diary now as a reminder. And don’t forget to budget for your tax bill to avoid any nasty surprises.

Also, if you are employed and receive a payslip from your employed, you can choose to fill in your tax return a bit earlier, by the 31 December, and ask HMRC to collect any tax you owe through your tax code (up to a maximum of £3,000).

Paying Tax on Cash In Hand Work Through Your Tax Code

Key Takeaways

  • It is not illegal to be paid cash in hand, but it is illegal by both the employer and employee to not tell HMRC about it depending on the amount and circumstances of the arrangement;
  • You can earn up to £1,000 tax-free, without letting HMRC know about it under the rules of the trading income allowance;
  • Once you get paid more than £1,000 you’ll need to register as self-employed with HMRC if you plan to be in business or register for self assessment if you have casual earnings;
  • The amount of income tax you pay depends on your total earnings and if you’re self-employed, you’ll pay class 2 and class 4 national insurance as well.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.