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.


If you pay someone ‘free of tax’ 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’s included

This includes:

  • ‘cash in hand’ payments
  • guaranteed fixed amounts of take-home pay

If you’re only making payments for part of your employee’s wages that are free of PAYE tax, and you deduct the employee’s NICs in the usual way, the rest of this guide tells you what to do.


Contact HMRC’s Employer Helpline for advice if any of the following apply:

  • you pay all of your employee’s pay free of tax
  • you make payments that are free of both tax and NICs
  • you pay an employee’s NICs yourself rather than deduct them from the employee’s pay - even if you don’t 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’ve paid on their behalf during the tax year
  • true gross pay - the pay they’ll actually receive will be different to what’s on their payroll record because you’ve had to calculate a ‘true gross pay’ figure
  • statutory payments - be clear about what pay figure you’ll use to work out if they’re entitled to statutory payments (eg for sickness or maternity) and how much they’ll 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’re 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’t been paid free of tax

To calculate the true gross pay of the free of tax element use the following steps:

  1. Multiply the free of tax pay by 100.
  2. Subtract the employee’s highest tax rate figure (this is 20, 40 or 45) from 100.
  3. 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’s an FPS or an Employer Payment Summary - show that you’ve made a free of tax payment to an employee.

Published 12 June 2014