Tips can be a significant additional source of income if you work in hospitality. However, you may be unsure if you have to pay tax and national insurance on this income.
No matter how tips are earned, whether they are received through cash or card payment, tax is always charged on them. However the charge of National Insurance Contributions (NIC) depends on how the tip was paid.
Tips are only exempt from NIC if either:
- the employer has not paid or allocated the employee tips from customers directly or indirectly.
- the tips are not money originally paid to the employer.
If a customer pays an employee directly then tax must be paid on the tips, but no national insurance is due. If the employee is completing a self-assessment tax return, they must declare cash tips.
If they do not complete a tax return, HMRC estimate the tips from information obtained from the employer and adjust the workers tax code to collect the tax on tips directly from their pay.
To prevent HMRC over estimating your tips, we advise you keep a record of them. If HMRC’s estimate is wrong you can tell them so they can adjust your tax code or you may end up over paying tax on tips you didn’t receive.
Often customers leave tips on a table and the employer may decide to split them between staff. In this case National insurance is due on the tips. If the employer allocates the tips to the employees the employer must operate PAYE.
Tips paid by card or cheque
Sometimes customers add a tip when paying their bill by card and cheque. As the tips are paid to the employer, if they decide to pay them to workers they need to make sure tax is paid and operate PAYE. Both the employer and employee will need to pay Class 1 National Insurance Contributions too!
A tronc is an arrangement for sharing tips. The person leading the tronc is known as a ‘tronc master’. They must tell HMRC about the arrangement and PAYE must be operated either under an individual PAYE scheme or via the employers PAYE scheme.
If the employer receives the tips first it is there responsibility not the tronc master to pay National insurance contributions to HMRC.
Advice (not a tip!)
Where possible, get tips in cash as although tax is due, you’ll save on the 12% Employees NI deduction!
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Added by Jon Davies
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