The payment of tips is commonplace for employees in the catering and service industries. As the pandemic has accelerated a move away from payment in cash, there has also been a shift towards customers paying tips electronically.
HMRC has updated its guidance for employers to include examples of systems for the electronic payment of tips. The guidance reflects that a payment made electronically does not change any of the basic principles for deciding how tax is to be accounted for on those tips and whether a national insurance contributions (NIC) liability arises.
Where the employer collects the tips and pays them to employees, the employer is required to deduct income tax and NIC from these payments.
Where customers pay tips directly to staff, each employee is responsible for declaring these earnings to HMRC. Any tax due is likely to be collected through an adjustment to the employee’s tax code. Direct payments from customers are not subject to NIC.
There are also separate rules for payments made through ‘troncs’ (a special pay arrangement used to distribute tips, gratuities, and service charges where a person other than the employer is responsible for sharing the amounts). These are also detailed in the updated guidance by HMRC.