Cash in hand work: how it is taxed and what to record.

Cash is income like any other

HMRC does not treat cash any differently from money paid into your bank. If you do work for customers and they pay you, that is trading income. It goes on your tax return whether it arrived by bank transfer, by card, by cheque or in an envelope.

The phrase "cash in hand" often suggests the money is somehow off the books. It is not. The only real difference with cash is practical. There is no bank statement showing it came in, so your own record is the main evidence of what you earned. Good records also stop you missing costs you could claim.

When you need to tell HMRC

There is a small tax-free allowance for trading income. The trading allowance lets you have up to £1,000 a year of trading income tax free. If your gross trading income for the year is £1,000 or less, you usually do not need to tell HMRC about it.

Note that the test is on gross income, before costs. Once your trading income goes over £1,000, you need to register for Self Assessment and file a tax return. Some people cannot use the allowance at all. For example, it does not apply to income from a partnership, or to income from your employer or your spouse's or civil partner's employer.

If you need to send a return for a tax year and have not sent one before, you must tell HMRC by 5 October after that tax year ends. For the 2025/26 tax year, that date was 5 October 2026. If you register after that, you could get a penalty. Our guide on how to register as self-employed walks through the steps.

How much tax you pay on cash earnings

You are not taxed on what customers pay you. You are taxed on your profit, which is your income minus your allowable business costs. Cash income is added to all your other self-employed income to work out that profit.

For the 2026/27 tax year (6 April 2026 to 5 April 2027), the Income Tax rates in England, Wales and Northern Ireland are:

• Personal Allowance. The first £12,570 of your total income is tax free.
• Basic rate, 20%. Income from £12,571 to £50,270.
• Higher rate, 40%. Income from £50,271 to £125,140.
• Additional rate, 45%. Income over £125,140.

Your Personal Allowance goes down by £1 for every £2 of adjusted net income over £100,000. Scotland has different Income Tax bands.

The Personal Allowance covers all your income, not just self-employment. If you also have a job, your wages will usually use up some or all of it first. Your cash profit may then be taxed from the first pound.

National Insurance

Self-employed people also pay Class 4 National Insurance on profits. For 2026/27 it is 6% on profits between £12,570 and £50,270, and 2% on profits over £50,270.

Class 2 National Insurance is no longer something you have to pay. If your profits are £7,105 or more, it is treated as paid to protect your National Insurance record. Below that, you can choose to pay voluntary Class 2 contributions at £3.65 a week. Our guide on paying National Insurance when self-employed covers this in more detail.

A worked example

Expenses you can set against cash income

Allowable expenses work the same way however you were paid. You can deduct costs that are wholly for the business, such as materials, tools, fuel for work journeys and phone costs for business use. The full list is in our guide to which expenses the self-employed can claim.

If your costs are low, you can use the £1,000 trading allowance instead of claiming actual expenses. You cannot do both. If your real costs are more than £1,000, claiming them will usually give you a lower bill.

Keeping records of cash payments

As a sole trader, you must keep records of your business income and expenses. With cash, you are building the record yourself, so it pays to make it a habit.

• Log each payment the same day. Date, customer, job and amount. A notebook works, but a spreadsheet or bookkeeping app is easier to total.
• Give receipts or invoices. Keep a copy of every receipt or invoice you issue, even for small jobs.
• Bank the cash regularly. Paying cash into a business bank account creates a second record. Note which jobs each deposit covers.
• Record cash you spend before banking it. If you pay for fuel or materials out of takings, record both the full income and the cost. Do not just bank the difference.
• Keep personal and business money apart. Cash taken for personal use is not a business cost, but the income it came from still counts.

You must keep your records for at least 5 years after the 31 January submission deadline for the relevant tax year. If records are lost and cannot be replaced, you must do your best to provide figures and tell HMRC you are using estimated or provisional figures. More on this is in our guide on how long to keep business records.

From the 2024/25 tax year, the cash basis is the default way for sole traders to work out profit. That suits many cash businesses, because income is counted when you receive it. Our guide to cash basis or traditional accounting explains the choice.

Filing and paying

For the 2025/26 tax year, the online return and any tax owed are due by 11:59pm on 31 January 2027. A paper return was due by 31 October 2026.

If your tax bill is £1,000 or more, you may also have to make payments on account towards the next year. Each payment is half of the previous year's bill, due by 31 January and 31 July. This catches out many people in their first year, so set money aside as the cash comes in.

Missing the deadlines is expensive. A late return gets an initial £100 penalty. After 3 months, daily penalties of £10 a day apply, up to £900. Further penalties follow at 6 and 12 months. Paying late adds 5% of the unpaid tax at 30 days, 6 months and 12 months, plus interest.

Making Tax Digital for Income Tax is also being phased in for sole traders above certain income levels. If it applies to you, your cash records will need to be kept in compatible software and sent to HMRC quarterly. See what Making Tax Digital means for the self-employed.

If you have not declared cash income before

If you have earned cash income in past years and not told HMRC, the best step is to put it right as soon as you can. HMRC says that telling them first may mean they consider your case more favourably.

• If you already file Self Assessment, you can amend a return that left the income out.
• If you do not usually file, you can register for Self Assessment to declare untaxed income from the last 4 years, with a separate return for each year.

You will owe the unpaid tax and may also have to pay a penalty. Giving HMRC false information about tax owed can lead to prosecution. If the amounts are large or go back several years, get advice from a tax adviser before you contact HMRC.

Common mistakes with cash work

• Only declaring the cash that was paid into the bank
• Recording net takings after paying for materials, rather than income and costs separately
• Forgetting that wages from a job use up the Personal Allowance
• Not keeping receipts for cash purchases, then losing the expense
• Not setting aside money for the January bill and the first payment on account
• Assuming that going over £1,000 in a year does not count because the work was casual

For an overview of the wider picture, see our guide on how much tax the self-employed pay.