In the hospitality trade tips and gratuities are part of an employees reward for good service.
I dined out this evening and added a gratuity to my debit card payment and my wife, unaware of this also left a cash tip on the table for the waitress (a double tip can be quite unsettling for us accountants).
This got me thinking and as a typical accountant I thought it a good idea to do a blog on HMRC’s advice on the subject (a bit sad I know!).
Employees receiving tips have to pay tax on any tips they get, and sometimes National Insurance contributions as well.
How the tax is worked out, and whether you have to pay National Insurance depends on:
- who the tips are given to
- who decides how the tips are shared out
Cash tips paid directly to the employee
If an employee is given a tip in cash directly by the customer, the employee must pay tax on them but not National Insurance by declaring tips on their Self Assessment tax return.
If the employee does not normally complete a tax return then HMRC will estimate their tips based on business sector and/or information from the employer. The tax on the tips will then be collected through the PAYE system by an adjustment to the employees tax code.
Tips included in card or cheque payments
If these tips are paid to the employee directly, the employer is responsible for making sure that it is included as part of the pay subject to tax through the PAYE system.
Sometimes the tips are pooled together and shared out – this is called a ‘tronc’ and has a separate PAYE registration and the person who looks after the ‘tronc’ known as the ‘troncmaster’ is responsible for making sure tax is deducted from the tips.
HMRC has a detailed guide on tips and troncs if you are or have a troncmaster
Download (PDF, Unknown)
If the employer decides how the tips are shared out, National Insurance is due as well as tax. The employer is responsible for making sure tax and National Insurance is deducted through PAYE.
These are added to the bill before it’s given to the customer.
If the charge is compulsory, it’s not a tip so if it is given to the employees, it is treated as part of their wages and subject to tax and National Insurance.
If the charge is voluntary, the employee pays tax and National Insurance in the same way as for tips above.
These are part of wages and subject to deduction of tax and National Insurance through PAYE.
Cash in hand wage payments
It is illegal for employers to pay wages ‘cash in hand’ without deduction of tax and National Insurance.
Discuss any issues raised in this blog with your accountant before taking action as every business has different circumstances.