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Are Tips Taxable

by Charlotte Anderson | Read time: 4 minutes | Jun 18, 2019
For many hospitality workers, tips form a percentage of their monthly take home pay and are an attractive incentive for those considering roles in the industry. However, rules on how tips should be processed and taxed is somewhat of a grey area, with many business owners and catering staff unsure of the correct protocols surrounding tips.

HMRC
The bad news is that unfortunately, HMRC do consider tips to be income from employment. However, the person liable for the tax depends on how the business receives the tip. 

Who's responsible?
So for instance, where a business adds a service charge to their bill, there is an important distinction between mandatory and discretionary charges. Where the tip is mandatory and is collected by the employer via cash, cheque or card and subsequently paid to the staff member serving the customer, then it is the employee who is subject to PAYE on the tip.

Shared tips:
Where tips are pooled and paid out to all members of the business (i.e. bar, kitchen) in different percentages, at the discretion of the business owner, then that payment is subject to both PAYE and NIC by both the employer and employee.

Customer to Server tips:
In the situation whereby a customer simply leaves cash on their table as a tip for their water/waistress, then PAYE is not deducted from the payment. However, in this instance, it is the employee's responsibility to declare tips to HMRC so that they can pay income tax on the funds.

Third parties:
Where a business owner uses a third party to determine the division of tips between staff, then provided that the third party makes the distribution at its own discretion and the employer isn't involved in the decision, then national insurance isn't payable.

Example:
Imagine a mandatory £5 service charge is added to a card payment which the employer distributes - £1 is paid in PAYE, £0.60 is paid in employees' NIC and £0.69 is paid by the employer in employers’ NIC. Which means that HMRC receive £2.29 out of a £5 tip



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