When are tips taxable?
The Summer season usually sees a rise in the number of casual staff taken on by restaurants and cafes. Whilst the tax and NIC implications of wages is generally straight-forward, confusion often arises regarding tips and gratuities as the necessary tax and NIC treatment depends on how they are paid to the recipient.
Cash tips handed to an employee, or left on the table at a restaurant and retained by that employee, are not subject to tax and NICs under PAYE, but the employee is obliged to declare the income to HMRC – HMRC often make an adjustment to the employee’s PAYE tax code number to reflect the amount likely to be received during a tax year and the tax and Class 1 NICs due will be collected via the payroll.
By contrast, if an employer passes tips to employees that are either handed to him (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made. Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.
The obligation to operate PAYE remains with the employer where the employer:
- delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant; or
- passes tips/service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes.
Where tipping is a usual feature of a business, there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster, he or she may have to operate PAYE on payments made. Broadly, under such arrangements the employer must notify HMRC of the existence of a tronc created and provide HMRC with the troncmaster’s name.
There are no hard and fast rules regarding how a tronc should operate and HMRC will apply the PAYE and NIC rules to the particular circumstances of each tronc. Where payments made from a tronc attract NICs liability, responsibility for calculating the NICs due and making payment to HMRC rests with the employer. If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his or her PAYE obligations, HMRC can direct the employer to operate PAYE on monies passed to the tronc from a specified date.
With regards to NICs, legislation provides that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’ will be exempt from NICs if it meets either of the following two conditions:
- it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers; or
- it is not allocated, directly or indirectly, to the employee by the employer.
Amounts paid by a customer as service charges, tips, gratuities and cover charges count towards National Minimum Wage (NMW) pay if they are paid by the employer to the worker via the employer’s payroll and the amounts are shown on the pay slips issued by the employer. Tips given directly to the worker by a customer do not count towards NMW pay.