What are the rules on customer tips and how to handle them for tax?
Your employees receive tips from customers.
Because tax (and possibly National Insurance) is payable on them, as an employer do you know your responsibilities and what can you tell your staff to help them avoid trouble with HMRC over tips and how to handle them for tax?
As a director or employee, if you receive a cash tip direct from a member of the public which you keep for yourself, the tax consequences are yours alone to deal with.
While the tips given this way count as earnings for tax purposes, the good news is that you don’t have to pay NI on them and neither does your employer.
Tips and how to handle them for tax
HMRC knows what types of job attract tips.
So, to avoid a tax investigation it’s important you keep a record of what you receive and declare this on your self-assessment tax return.
If you’re not in self-assessment, you can tell HMRC by phone or in writing how much in tips you have received after the end of each tax year. If you call, keep a record of when you rang, who you talked to and what you told them.
HMRC uses the information you give it to do two things. First, issue a tax calculation (P800) or assessment (P302).
Second, adjust your tax code with an estimate of the tips you’ll receive for the current year. – after the end of the tax year you again notify HMRC of the amount you actually received and the P800/assessment and code adjustment cycle starts again.
Once you’re in the system HMRC will keep taxing you on tips until you tell it you no longer receive them, say because you’ve changed jobs or your employer is now applying PAYE to them.
If HMRC issues an assessment or tax calculation which includes a figure for tips, make sure it ties up with your records.
It’s not uncommon for it to use an estimate even if you’ve reported the actual figure. You should notify HMRC about any discrepancies.
As an employer you might be involved in handling tips for your staff. If you collect and distribute them to your employees, you must add them to their salary when you do your payroll.
This means PAYE tax and NI (employers and employees) are paid on the tips.
This rule covers tips handed to you be your employees, and those put in a common box or plate by customers which you pass on. PAYE and NI also applies to customer service charges you pass, wholly or partly, on to your employees.
If you staff operate a “tronc”, i.e. an employee collects all tips and distributes them to the others without your involvement as 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 payroll figures.