Are you and your staff handling tips correctly? If you operate a café or restaurant, your employees will receive tips from the majority of customers. But as a business owner, what do need to do regarding income tax on these tips? Head of our Payroll Team Joanne Gibson explains.
The starting point is to confirm that tips are taxable. However, the responsibility for reporting them to HMRC differs depending on exactly how they are received. You need to understand the differences so that you can avoid mistakes and help your employees to avoid problems too.
If your employee receives the tip directly from the customer and they keep this, the tax consequences are for them to deal with individually. The employee concerned will need to declare their tips to HMRC and pay income tax on them. There is no employees’ or employers’ NI charge though.
As an employer you might be involved in handling tips for staff. If you collect and distribute them to your employees, the tips must be added to their salary when you run the payroll. This means PAYE tax and NI, both employers’ and employees’, are paid on the tips. This rule covers tips handed over by the employees, and those put in a common box or plate by customers which are then passed on. PAYE and NI also applies to customer service charges you pass, wholly or partly, on to your employees.
It will therefore be cheaper for you and your employees if you aren’t involved. A halfway house might be to suggest a nominated employee to organise tip sharing.
If your staff operate a ‘tronc’, i.e. an employee collects all tips and distributes them to the others without the involvement of their employer, they might need to account for PAYE tax (but not NI) on payments they make.
Where an employer or tronc handles tips, there’s no need for employees to separately report them to HMRC as the figures will already be included in the payroll.
Helping your employees
If you are not involved with staff tips and there is no tronc, the employees may be completely unaware that they need to report the amounts. For part-time and weekend staff, this may not be an issue as their income is probably below their personal allowance. However full-time staff and those who have multiple jobs could find themselves having a tax investigation. You can reduce the risk of this by providing training or information for your staff.
You should inform your employees that they either include it in their self-assessment return (if applicable) or call HMRC at the end of each tax year. HMRC will then issue a calculation showing the underpayment, if any.
It’s likely that the PAYE code will also be adjusted in later years to collect the tax each month. It will be useful for the employees to monitor this and contact HMRC again to change the code if the level of tips increases or decreases substantially.
If you are involved in distributing tips as an employer, you will need to operate PAYE and NI on the amounts. If employees do collect and keep tips themselves, it is for them to report the amounts and pay the tax.
We would recommend that you consider setting up a tronc which provides administrative organisation whilst continuing to be exempt from NI.