Tips

Introduction

If you receive tips from customers, you must pay income tax on them, but you may not have to pay National Insurance contributions (NIC). The way in which you work out your tax and NIC on tips depends on who the tips are given to and who decides how to share the tips.

You must declare tips properly for tax purposes whether you are an employee or self-employed, whether you get them in cash or in another way.

Tips do not count as income for national minimum wage purposes, but they do count as income for other purposes, such as tax and universal credit.

Tips and employees

Some customers leave tips in the form of a service charge or by adding it on to a debit or credit card payment. When a customer pays a tip directly to the employer in this way, employers must pass the amount on to their employees in full. This has been a legal requirement since October 2024. You can find some guidance on the new rules on the ACAS website.

The Code of Practice for employers on the fair and transparent distribution of tips, which came into force on 1 October 2024, can be found on GOV.UK. There is also some further guidance available for employers on how to apply the new law on tips. Although the new rules on the fair and transparent distribution tips do not change the tax treatment of tips, it is important for workers to understand:

• some employers will pay service charges over to workers for the first time (as opposed to keeping them) and/or
• some employers will adopt different practices, such as removing service charges so that they do not have to handle tips.

As a result, you may start to receive tips and/or receive them in a larger amount – and potentially in different ways. For example, you might receive tips directly (such as cash tips left on the table – see below).

Where your employer passes tips on to you, then the employer must operate pay as you earn (PAYE). This means that your employer should deduct income tax and NIC from the tips before you receive them. This also means that you should not have to do anything else to notify HMRC or DWP about your tips for tax or universal credit purposes.

A similar situation occurs where tips are paid via a ‘tronc’. A tronc is where tips are pooled and where someone other than the employer (a head waiter or waitress for example) controls and distributes them. Tips paid through a tronc should be taxed before you receive them. But if the tronc is set up correctly, tips can be paid NIC-free through the scheme. This saves you money.  

Cash tips

If you get cash tips directly from a customer without your employer being involved, the tips belong to you. This includes any change left on the table by a customer for you, any cash handed to you and any money left in a tip box or dish by the till to be informally shared out (in which case, it belongs to you and your fellow employees as a group).

Although tips do not count as ‘income’ towards the national minimum wage – meaning that you should receive the minimum wage with any tips on top – cash tips should not be thought of as a ‘gift’. Rather, they are classed as employment income which means they are taxable (but not subject to NIC) on you. Although they are taxable, there will not be any tax deducted from them. This means you are responsible for telling HMRC about these tips.

To help you meet your obligations in relation to cash tips you should do the following:

Keep records of your tips

You will have to show cash tips received on your self assessment tax return (if you fill one in). If, as in many cases, you do not have to fill in a tax return because all your income is taxed under PAYE, you should tell HMRC about your cash tips. HMRC will usually adjust your tax code to collect the tax due (see below). Otherwise, they may send you a bill at the end of the tax year or ask you to fill in a tax return.

You can tell HMRC to adjust your tax code via your personal tax account or by phoning the HMRC income tax helpline. Have your National Insurance number with you when you phone. It is a good idea to make a note of the date and time of your call, as well as the name of the adviser that you speak to and what is said.

To adjust your tax code, HMRC will need to know how much you received in cash tips. This means that you must keep a good record of what you have received. If you do not do this, HMRC may estimate your tips. This might be a rough calculation based on the sales of the business you work for and the number of employees. This could lead to an overestimation of your cash tips and you paying more tax than you need to.

Universal credit

The meaning of employment income for universal credit broadly follows employment income for tax purposes. As such, any tips you receive may be counted as employment income for benefits purposes.

HMRC use the employment income information provided on an employer’s real time information (RTI) payroll reporting for universal credit. Tips that are paid through PAYE (including under a tronc) will be included on RTI payroll reporting and will be automatically picked up for universal credit.

RTI payroll reporting will not show cash tips, so unless you declare them as employment income to HMRC or DWP yourself, your benefits award might be wrong. This could result in your receiving too much money in benefits and possibly a penalty.

Check your tax code

Once HMRC have ‘coded in’ an amount in respect of your tips, make sure you check your PAYE coding notice regularly to check if the amount is still accurate. If you do not do this, and the amount of tips you receive goes down, you will end up paying too much tax. If the amount of tips you receive goes up but the amount in your code stays the same, you could end up owing HMRC money.

Tips and the trading allowance

Tips are taxable as employment income because even though they are given to you by a customer, they relate to an employment. There is guidance on this on GOV.UK.

The trading allowance allows you to get a small amount of ‘miscellaneous’ or trading income before you need to report it or pay tax on it. Unfortunately, employment income is not covered by this, meaning that you must pay tax on your tips from the very first £1!

Electronic tipping

Cashless or electronic tipping is becoming more common. Methods of cashless tipping include apps which customers can download to make tips, and links or QR codes that customers can use to make tips.  Sometimes there might be a physical terminal that customers can tap with a contactless card.

The basic principles apply to cashless tips. This means:

• Where cashless tips are received, managed, and then distributed by the employer, the employer must operate tax and NIC via PAYE – as they would for any other tips controlled by the employer.
• Where cashless tips are pooled and then processed via a tronc, then the usual tronc rules will apply.
• Where cashless tips are paid directly to the employee without the employer’s involvement (for example by the app) – then these are treated like cash tips. The employee will need to declare them to HMRC. We understand that the customer usually pays any fees for making an electronic payment. However, sometimes fees or commissions may be paid by you. Although they may be deducted from your tips before they are distributed to you, it is our understanding that strictly, you should be declaring the gross amount to HMRC (that is, the tips before any deductions).

You can read about tips if you are self-employed on our page on calculating self-employed profits.

More information

You can find HMRC’s booklet E24 on GOV.UK. This contains guidance on tips, service charges and gratuities and explains how troncs should be operated. Please note that although this guidance is aimed at employers, employees may find it useful too.