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If tipping is common in your line of work, then you might be asking yourself, ‘are tips taxable?’
In short, yes. Tips are taxable.
According to HMRC, whether you’re a hairdresser, taxi driver, bartender or waiter, you’ll have to pay Income Tax on any tips you receive whilst at work. In some cases, you may even be required to make National Insurance contributions too.
We spoke to our trusty partner URocked, a brand new app-based startup that specialises in cashless tip collecting. Here’s what they told us:
The value of tips in [the UK hospitality] market is worth £5.2 billion. On average someone leaves a gratuity 30 times a year with an average of £105 spent on tips per annum. But even though you may only choose to tip a handful of times a year, there are a lot of people who rely on tips to boost their earnings.URocked
If you’ve made lots of tips over the past few months and are unsure how they’ll be affected by tax, here’s everything you need to know about tipping and tax in the UK.
There are many ways to receive tips in the UK. Some of the most common include:
It’s important to remember that all of these tips are taxable in the eyes of HMRC.
No matter how much you receive, or how you get it, the money you make from tips is taxable. The amount of tax owed, and how it’s paid, depends on who the tips are for and who decides how they’re shared out.
It’s important to know that if you fail to declare your earnings from tips, HMRC will estimate it for you. They then deduct the tax directly from your income via PAYE.
If a customer directly gives you a cash tip, you’ll have to pay tax on the amount given. But you won’t pay National Insurance. You’ll pay this Income Tax through one of two ways:
Calculate how much tax you’ll pay on your Self Assessment tax return by using our income tax calculator below!
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As a self-employed you have to pay your income tax and national insurance contributions yourself during your annual self assessment. Our calculator helps you quickly assess how much payment is due.
However you may be eligible for a tax refund when:
In your case when you earn £49,000:
You pay no income tax on first £12,500 that you make
You pay £7,300 at basic income tax rate (20%) on the next £36,500
Service charges are added to a bill before it’s given to a customer.
If the service charge is voluntary, you’ll pay tax on and National Insurance on the amount. This is done in the same way you would for any other tip. If it’s compulsory, then the money is not classed as a tip. If your employer gives you a share of the service charge, it’s treated the same way as receiving your wage.
If a customer gives you a tip via a card or cheque payment, your employer is responsible for making sure Income Tax is paid through PAYE.
If all the tips are pooled together and shared equally amongst staff members, this is called a ‘tronc,’. The person responsible for sharing the tips is a ‘troncmaster.’ The troncmaster is also responsible for making sure the right amount of Income Tax is paid to HMRC, as well as National Insurance.
Bonuses are similar to tips, but they’re classed as part of your pay. You’ll pay tax and NI on them through PAYE.
Cash in hand wage payments are illegal! This is because your employer is paying you a wage without deducting tax and NI contributions. If you accept cash in hand payments, you risk losing your employment rights, and may even have to pay the tax contributions back yourself!
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