You may be unaware that tips are actually taxable earnings, so here are some tips to ensure you are getting the tax treatment right

Tips collected by the employer and passed to the employee

When the employer collects the tips by way of a service charge or credit/debit card and then passes them onto the employee, it is the employer’s responsibility to ensure that PAYE is operated. The tax and national insurance should be deducted before the employee receives them.

If the employer uses a ‘troncmaster’ to process the tips, the distributions to the workers can be made without a national insurance deduction.

Cash Tips

It is a common misconception that cash tips are not taxable. It is the employee’s responsibility to notify HMRC that they have received tips and to pay the tax over. Cash tips are however not subject to national insurance.

You can notify HMRC in writing or by phone. HMRC will adjust the tax code based on a number of tips received, in order to collect the tax due.

Things to remember:

  • If your cash tips change year on year, you should keep a record of everything received so that you are taxed on the correct amount.
  • Keep an eye on your tax code, you may overpay or underpay tax as your tips vary year to year.

Tips declared to HMRC may count towards your income for tax credit purposes

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