HMRC has issued new guidance to employers about the tax and NI which is payable on tips. It explains the position when customers choose to tip electronically.
The most common form of electronic tipping is already explained in the existing E24 guidance. Where customers pay by card, Apple Pay and so on, and add a tip to the method of payment, it is who first receives the payment that determines how it is taxed.
If tips go to the restaurant which distributes them to its employees (whether or not they pass on the whole amount), the employer must add what they pay to each employee to their normal pay and account for PAYE tax and NI in the usual way.
However, in May 2022, HMRC added new guidance to its E24 notice when National Insurance and PAYE is due on tips, gratuities and service charges. The new guidance relates to electronically paid tips. It addresses the question of how the tax (and NI, where applicable) is collected, that is either by the employer through the PAYE system or by the employee through their self-assessment or tax code.
HMRC’s new guidance is mainly in the form of examples about other forms of tipping electronically which are becoming more common.
This can be summarised as follows:
A restaurant offers deliveries. After the driver has delivered a meal, software automatically sends a text/email to the customer asking if they want to pay a tip to the delivery person. Payments are received by the restaurant which then pays the driver. The tax and NI position is the same as explained above.
However, when the software links to the driver’s bank account (or the server’s bank account if the meal is taken in a restaurant), the position changes. When the customer pays a tip it goes direct to the driver/server. The employer is not involved and therefore the payment is not subject to PAYE tax or NI. Instead, the employee must declare the tips to HMRC and pay tax on them.
If the employer receives tips paid electronically and passes them to its employees, it must apply PAYE tax and NI to the payments. Otherwise, it’s up to the employee to declare the tips to HMRC and pay the tax, although there’s no NI.