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Are tips taxable?

  • 3 min read
  • 25 Jan 2022
Are tips taxable - TaxScouts blog

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.

How tips are paid in the UK

There are many ways to receive tips in the UK. Some of the most common include:

  • In cash. This could be given to you at the end of a shift by your manager, or directly from a customer/client
  • Tips that are added on as part of your wage or pay packet
  • An amount of cash that is collected and then shared between all members of staff

It’s important to remember that all of these tips are taxable in the eyes of HMRC.

How do I know if my tips are taxable?

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.

Cash tips

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:

  1. Self Assessment: if you decide to file a tax return, then you must include the money earned from your tips
  1. Alternatively, HMRC will estimate the amount of tips you received based on the information provided from you or your employer. They’ll then give your employer a tax code. This lets them collect the tax through PAYE, which’ll be taken from your wages before you’re paid

Calculate how much tax you’ll pay on your Self Assessment tax return by using our income tax calculator below!

Your situation

Outlined number oneOutlined number one
I am
Annual self-employed income
Self-employed expenses
?

Tax and profit

Outlined number two
  • Total earnings
    £50,000
    £1,000 tax-free Trading Allowance
    ?
  • Tax to pay
    £10,994
    £7,286 income tax
    £159 class 2 National Insurance
    £3,549 class 4 National Insurance
  • What you’re left with
    £39,006

How your income tax is calculated

When you’re self-employed, you have to pay your income tax and national insurance contributions yourself in your annual Self Assessment. Our calculator helps you quickly assess how much you owe.

However you may be eligible for a tax refund when:

  1. You already made tax payments for the year but your annual income ended up less than planned
  2. You have done things that qualify for a tax relief (made private pension contributions, given to charity, etc.)

In your case when you earn £50,000:

Income tax breakdown

You pay no income tax on first £12,570 that you make

You pay £7,286 at basic income tax rate (20%) on the next £36,430

National insurance contributions breakdown

No contributions on the first £9,568 that you make

You pay £3,549 in contributions (at 9%) on the next £39,432 that you make

You pay £159 in NI Class 2 contributions

Service charges

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.

Tips included in card or cheque payments

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

Bonuses are similar to tips, but they’re classed as part of your pay. You’ll pay tax and NI on them through PAYE.

My employer wants to pay my wage cash in hand, is this legal?

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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