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Wednesday, 3 October 2023

Money, tax and benefits

Money, tax and benefits

Tax and National Insurance on tips and bonuses

You'll have to pay Income Tax on any tips you get when you're working. But you may not have to pay National Insurance contributions. You'll usually pay the tax and any National Insurance contributions through PAYE (Pay As You Earn).

Tips

A 'tip' is a payment that is freely given by the customer, normally in return for services. A compulsory service charge is not a tip because it is not freely given.

How your tax is worked out, and whether National Insurance contributions are due, depends on the arrangements involving:

  • who the tips are given to
  • who decides how they're shared out

Cash tips paid directly to you by the customer

If you get cash tips direct from the customer without involving the employer, you'll have to pay tax on them - but not National Insurance contributions. You are responsible for telling HM Revenue & Customs (HMRC) about these tips and you'll have to show them on your Self Assessment tax return (if you fill one in). You'll need to keep a record of the tips you get so you can do this.

Most people don't have to fill in a tax return. If you don't, HMRC will estimate the tips you're likely to get and give you a tax code that will collect the tax through PAYE. Get in touch with HMRC if you think the estimates are wrong.

Tips paid as part of a card or cheque payment

Some customers may pay their bill by cheque or credit/debit card and add your tip to the payment made to your employer.

If your employer decides to pass on cheque and credit/debit card tips to you they may pass them directly to you or to a 'tronc' (or pool) which shares out tips amongst the staff who are tronc members.

If your employer passes the tip on to you directly:

  • it's their responsibility to collect tax on it through PAYE
  • if the employer decides how the tips should be shared out, National Insurance contributions are due and it's always the employer's responsibility to collect these through PAYE
  • if the employer doesn't decide or influence how the money is shared out amongst the employees National Insurance contributions won't be due

If your employer passes on tips paid as part of a credit card or cheque payment via a tronc or pooling arrangement, the rules in the section below apply.

Tips paid into a tronc and shared by staff

Sometimes tips are pooled and then shared out between all the staff. This is known as a tronc and the person who shares out the tips is called a 'troncmaster'.

When the tips are shared out, the troncmaster has to deduct Income Tax from them through PAYE.

The rules on National Insurance contributions where there are tronc arrangements in place are as follows:

  • if your employer decides, either directly or indirectly, how the tips are shared out, you'll have to pay National Insurance contributions on them as well as tax - your employer (not the troncmaster) has to collect the National Insurance contributions through PAYE
  • if your employer doesn't decide, either directly or indirectly, how the tips are allocated to employees through the tronc, National Insurance contributions won't be due

Your employer has to tell HMRC if there's a tronc and who the troncmaster is. If it's you, you'll be the one responsible for collecting the Income Tax through PAYE. You can get help and advice on what you've got to do from the Business Education and Support Team in your area.

Service charges

A service charge is an amount added to the bill before it's given to the customer. A compulsory service charge is not a tip. If your employer gives it to you, it's treated in the same way as your wages and you'll pay tax and National Insurance contributions on it.

If it's a voluntary service charge, it's treated in the same way as a tip. How you pay tax and National Insurance contributions on it depends on whether it's:

  • cash that is paid direct to you by the customer and that you keep
  • added to a card or cheque payment
  • pooled in a tronc

Bonuses

If your employer pays you a bonus, it's just part of your pay for the job - and you'll pay tax and National Insurance contributions on it through PAYE. Your employer includes it on your payslip with the rest of your pay.

Where to get help

Ask your employer if you want to know anything about the way tips, service charges or bonuses are being dealt with. If you're still not clear, contact HMRC.

More useful links

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Provided by HM Revenue and Customs

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