Paying employees cash in hand or guaranteed take home pay
What to do about tax and National Insurance if you pay an employee free of tax.
Overview
If you pay someone 鈥榝ree of tax鈥� you must get your employee to agree to you doing this and make sure you work out the correct amounts of PAYE tax and National Insurance contributions (NICs) to pay to HM Revenue and Customs (HMRC).
What鈥檚 included
This includes:
- 鈥榗ash in hand鈥� payments
- guaranteed fixed amounts of take-home pay
If you鈥檙e only making payments for part of your employee鈥檚 wages that are free of PAYE tax, and you deduct the employee鈥檚 NICs in the usual way, the rest of this guide tells you what to do.
Exceptions
Contact HMRC鈥檚 Employer Helpline for advice if any of the following apply:
- you pay all of your employee鈥檚 pay free of tax
- you make payments that are free of both tax and NICs
- you pay an employee鈥檚 NICs yourself rather than deduct them from the employee鈥檚 pay - even if you don鈥檛 agree to pay any tax on their behalf
Your employee agrees to have pay free of tax
Before you start to pay them make sure your employee knows what will happen about the following:
- tax refunds - tell them what happens to refunds of tax you鈥檝e paid on their behalf during the tax year
- true gross pay - the pay they鈥檒l actually receive will be different to what鈥檚 on their payroll record because you鈥檝e had to calculate a 鈥榯rue gross pay鈥� figure
- statutory payments - be clear about what pay figure you鈥檒l use to work out if they鈥檙e entitled to statutory payments (eg for sickness or maternity) and how much they鈥檒l get
Use the gross pay on which NICs are payable to work out average earnings for statutory payments.
Calculating true gross pay
Your payroll software may be able to calculate the true gross pay and the deductions needed - if you鈥檙e not sure, check with your software provider.
If you have to manually calculate the gross pay figure, add the following 2 amounts:
- the true gross pay of the free of tax element of the earnings
- the actual gross pay of the part of the earnings that haven鈥檛 been paid free of tax
To calculate the true gross pay of the free of tax element use the following steps:
- Multiply the free of tax pay by 100.
- Subtract the employee鈥檚 highest tax rate figure (this is 20, 40 or 45) from 100.
- Divide the answer to step 1 by the answer to step 2.
What to report
Report payments made to an employee on a free of tax basis on your Full Payment Submission (FPS). And when you submit your final submission of the year - whether it鈥檚 an FPS or an Employer Payment Summary - show that you鈥檝e made a free of tax payment to an employee.