The Trip with Tips - When is tax due and by who?

20 November 2017

Gratuity, a sum we as a customer, give as a reward based on the level of service we feel we have received at a restaurant or bar. There are different ways in which we can tip service staff, whether it is by adding it onto our card payment or leaving some change on the table, and typically, we will choose to leave change on the table as we believe this will go directly to the individual who served us. However, for service staff, tips are seen as part of their income and so sometimes tax and National Insurance will be due.

Where money is left on the table and the staff member takes it away, the employer is seen to have no involvement in the processing or handling of this and therefore the tax due should have been handled by the individual themselves, through the means of a self-assessment tax return. This then allows the income tax due on the sum, to be collected by HM Revenue & Customs accordingly, although no National Insurance Contributions (NIC) would be due.

When a tip is given to the employee through payment by card, the employer is responsible for ensuring income tax is paid through Pay As You Earn (PAYE) on distribution. If the employer does not pay that sum directly to the employee and pools all card tips to later distribute among employees, National Insurance will be due on the sum in addition to tax through PAYE.

In some circumstances, an employer may choose to operate a scheme where all staff agree to place all tip earnings into a pool, and then allocate them to employees in a number of different ways. For example, the tips could be given in cash amounts to employees or used to cover costs of employee gifts and entertainment. In this case, the employer will initially receive the tips and therefore the responsibility to account for income tax and National Insurance on distribution solely lies with the business. Most commonly under such arrangements, the business would not tend to want the employees to pick up the cost of any tax or National Insurance due on any gifts or entertainment provided and therefore would pick this up on behalf of employees by way of a Pay As You Earn Settlement Agreement (PSA). Any cash amounts paid out of this account directly to employees, is however fully reportable through payroll with tax and NIC deducted.  

If you are a business involved in the payment of tips to staff or an individual who receives tips through your employment and would like further information or assistance, please do not hesitate to contact Charlotte Stewart (charlotte.stewart@aab.uk) or your usual AAB contact.