We often get asked by clients how tax is paid on staff tips and the options available to help them stay within the rules set out by the government. While the rules are clear it can be confusing to understand exactly where you stand and the best option for your business.
It is impossible to cover every possible scenario here as every business is different, however we have outlined the essential parts and included helpful links to the relevant documents. As always we are here for advice so why not tweet us using #askharlands with any staff tip related questions.
The rules apply to every business, however restaurants, bars and businesses within the service industry are where employees receiving tips are most common. The main thing to understand is that tips must be taxed and it is illegal to pay employees tips as cash in hand without paying tax. As well as tax, National Insurance may also need to be paid on tips in certain circumstances.
The two most common ways employees receive tips are in cash direct from a customer or tips paid into a central pool and divided between all the staff. You could decide to use a member of staff to organise how the tips are shared, this person would be called the Troncmaster. They would run a second payroll and as long as they decide how the tips are split and not the employer then you don't need to pay National Insurance contributions on them. You could also decide to use your current payrol provider to run a second payrol just for the tips. For many employers the easiest option is to just pay tips in with your employee wages and pay the required tax and National Insurance through PAYE.
If an employee receives cash tips direct from a customer then they would need to pay tax but not National Insurance on those tips. If this all sounds confusing then a handy table and further information can be found here. There are also different rules for service charges that are compulsory and those that are optional.
As an employer you need to inform HMRC who the Troncmaster is if you have one and make sure all your staff are briefed on declaring tips and the system you have in place. This will stop any issues with HMRC down the line.
If you have lots of weekend staff that don't earn enough to pay tax anyway then it won't affect them and we would suggest just paying their tips through their wages as this is the easiest option for you, however full time staff or higher earners who already pay tax would then have additional National Insurance to pay. Depending on the amount of tips you get will depend on whether you want the extra cost of running more than one payroll and you may decide to add tips to staff wages and pay the tax through PAYE as mentioned earlier. As we said there are so many options that if you are unsure then we suggest you seek advice.
If you have any questions then feel free to contact us and speak to our payrol department.
The following document outlines in further detail the rules on tips.