Tax on Tips and Gratuities

Introduction

If you receive tips at work, you must pay Income Tax on them — and in some cases National Insurance too. How you report and pay tax on tips depends on whether customers pay you directly or whether tips are distributed through your employer or a tronc system.

How tips are paid

Tips can reach you in three main ways:

• Directly from customers — in cash or electronically (for example, through a mobile payment app)
• Through your employer — added to your pay packet, such as discretionary amounts customers added to card payments
• Through a tronc — a separate system for collecting and distributing tips fairly among staff at your workplace

Understanding how you receive tips is important because it determines who reports them to HMRC and whether you'll pay National Insurance.

Tax on tips paid directly to you

When customers give you tips directly and you keep them, you are responsible for reporting these to HMRC yourself. Tips do not count towards National Minimum Wage calculations, but they are taxable income.

You must report direct tips in one of three ways:

• In a Self Assessment tax return (if you already complete one)
• Through your personal tax account online
• By calling HMRC directly

Once you've reported your tips, HMRC will adjust your tax code if necessary. Your employer will then deduct the tax you owe on tips through your normal wages under PAYE (Pay As You Earn). You will not pay National Insurance on tips received directly from customers.

If the amount you receive in tips changes significantly during the year, you should update your personal tax account or contact HMRC again. This helps ensure you don't overpay or underpay tax throughout the tax year.

Tax on tips paid through work

You do not need to report tips yourself when they are:

• Passed on by your employer (such as discretionary tips customers added to bill payments)
• Paid through a tronc system

Your employer or the tronc operator handles the tax reporting for you. Any Income Tax you owe on these tips will be deducted automatically when you receive payment.

National Insurance may or may not apply to these tips, depending on how much your employer is involved in deciding how tips are shared among staff. If you do need to pay National Insurance, your employer will deduct it from your wages alongside the tax.

Service charges explained

Service charges are different from tips because they're added to the bill before it reaches the customer.

Compulsory service charges are not legally considered tips. If your employer passes a compulsory service charge to you, it's treated exactly like your wages for tax purposes — you'll pay both Income Tax and National Insurance on it.

Voluntary service charges are treated the same as tips for tax purposes. The rules above apply depending on whether you receive them directly or through your employer or tronc.

Bonuses vs tips

Bonuses are part of your employment pay, not tips. You will pay both Income Tax and National Insurance on any bonuses you receive. Your employer deducts these taxes before you receive the money.

Your employer's responsibilities

Since recent legislation, all tips must be given to workers without deductions. Employers must follow a statutory code of practice on distributing tips, which requires:

• Fair and transparent distribution of tips
• A written tipping policy
• Accurate record-keeping
• Clear procedures for resolving disputes

If you have questions or concerns about how tips are handled at your workplace, you can contact Acas for advice.

What you need to do

If you receive tips directly from customers:

1. Keep a record of tips you receive throughout the tax year

2. Report them to HMRC through Self Assessment, your personal tax account, or by phone

3. HMRC will adjust your tax code so tax is collected through your wages

4. Update HMRC if your tip income changes significantly

If tips come through your employer or a tronc:

• You don't need to take any action
• Tax (and possibly National Insurance) will be deducted automatically
• Check your payslip to ensure deductions are correct

Cash in hand payments

It is illegal for your employer to pay your wages cash in hand without deducting tax and National Insurance. This is different from receiving cash tips directly from customers.

If you accept undeclared cash in hand wage payments, you risk losing your employment rights and may be required to pay the tax and National Insurance yourself. If you believe your employer is not paying tax or National Insurance on your wages, you can report them to HMRC.

Sources

• Tips at work

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.