Every business has a responsibility to ensure it follows the relevant rules and regulations. If you are an employer, make sure you do everything you can to get it right.
Equally, as an employee, you should also be aware of your own responsibilities, as well what your rights are and what your employer should be doing with regard to, for example, pay, contracts, time off and working hours.
Paying Your Tax & NI
All employees in the UK are obligated to contribute financially to the state and this is done through Pay As You Earn (PAYE). PAYE is the system used by Her Majesty's Revenue and Customs (HMRC) to collect Tax and National Insurance from employees and it is calculated based on earnings. Tax and National Insurance is deducted throughout the year every time the employee is paid and the employer is responsible for doing this and paying what they have collected over to HMRC.
As a nanny you are an employee like any other in the UK and as such you are required to pay Tax and National Insurance to the state. The family or families you work for are responsible for operating a PAYE Scheme for you, deducting the Tax and National Insurance you owe from your earnings and paying it on your behalf to HMRC.
However, as an employee, it is prudent to take some personal responsibility and ensure that your employer is doing this for you. If a PAYE Scheme is in operation, you should be receiving a payslip every time you are paid, showing your Gross Wage, all Tax and National Insurance deducted for that pay period, plus any other deductions you may have to make such student loan repayments, and your Net (take-home) Pay.
Important: Never assume that your tax is automatically being paid, especially if you aren't receiving regular payslips. Many nannies have fallen foul of this and have experienced difficulties as a result (see below).
When tax isn't paid
To put it bluntly, not paying Tax and National Insurance is considered a criminal offence. If caught, both your employer and you could find yourselves in a lot of bother, not only with having to cough up for unpaid back tax and potential fines but also with the added inconvenience of having retrospective admin to deal with. It's a lot of unpleasantness that can be easily avoided.
And while being paid 'cash in hand' may seem nice and easy in the short term, it can create long term difficulties; your Statutory Rights such as Maternity Pay, Sick Pay, Pensions and Redundancy will be seriously affected, and mortgage or loan applications will also be problematic as lenders require proof of earnings — often your last six payslips and last P60. Read more here about Undeclared Income.
Sources: http://www.acas.org.uk/index.aspx?articleid=4663 or http://www.nannytax.co.uk/helping-you/paying-your-tax-ni