There is no rule saying you cannot pay employees in cash. Indeed this lessens banking fees for many businesses who are paid in cash. However, HMRC take a lesser (and naturally suspicious) view of cash paid employees so it is advisable if possible to pay by bank transfer as this produces a perfect audit trail.
However, it is commonly understood that "cash in hand" means no declaration on payroll submissions and no tax/ni/auto enrolment deductions either. This is illegal, inadvisable and will land you in trouble with HMRC. Further, it bypasses many rights that workers have, if they leave disgruntled you can be sure a tribunal will follow.
Undeclared paid employees also result in either (a)undeclared sales or (b) higher taxes on the business owner due to not claiming this cost. Either way it's a lose-lose and we advise against it.