Tips - are they taxable?

27th February 2018 by Fiona Hotston Moore

Tipping practices have been in the press recently as some high profile restaurants were exposed for not passing on service charges to their staff.  However, aside from the ethical issue of whether tips belong to the staff, the taxation of tips is also not straightforward.

The starting point is that tips passed to the employee are taxable and, in addition, national insurance may also be due.  How the tax is calculated and collected and whether national insurance is due depends on who receives the tip and who decides on how  it is distributed.

If the employee receives and keeps the tips directly from the customers they will pay tax but not national insurance. The tax will be collected via their tax code or the tips must be declared on their tax return.

If tips are paid via credit card or cheque payments and then passed to the employee it is the responsibility of the employer to account for tax via the payroll.

If tips are pooled together and then shared out this is known as a “tronc” and the tronc master is responsible for deducting tax. National insurance will be due only if the employer acts as tronc master and decides on the division of the tronc monies.

If a service charge is added to the bill and is non discretionary it is not treated as a tip but rather as extra takings of the business. If the business passes some, or all, to the staff it should be paid via their wages and is thus liable to tax and national insurance.

The big advantage of a Tronc system, provided its not controlled by the employer, is the national insurance saving of 26% and thus the opportunity to increase the take home pay of your staff.

Finally, just a reminder, that it’s a crime to pay staff “cash in hand” without accounting for tax and HMRC take a dim view of tax evasion.


Fiona Hotston Moore

Fiona Hotston Moore

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