If you run a business, such as a restaurant, café or bar, where your staff receive tips, you will already know that they must pay tax on them.
However, how the tax is worked out and whether National Insurance (NI) is payable (by you or them) is a far trickier issue and will depend on:
- Who the tips are given to
- Who decides how the tips are shared out.
If your employees receive and keep tips direct from customers, the tax is payable to HMRC directly from the employees. They must declare the tips on their tax returns to ensure they pay the correct amount.
Where tips are collected and paid by you or someone else, such as a bar manager, you or the other person must apply PAYE tax. If you pay your employees their tips you must add them to their normal pay. If someone else (e.g. the head waiter), shares out and pays the tips, you must inform HMRC of the arrangement, but it is the other person who must operate a PAYE scheme.
Determining if there is a NI liability can get a little more complicated. Neither employers nor employees are liable to pay NI on tips, as long as you don’t directly or indirectly pay them to your employees from money left by customers, or allocate them to your employees individually (i.e. you decide who gets what).
Where it is you as an employer who decides how much in tips your employees receive, even if you’re only passing on amounts left by customers, they are liable to both employers’ and employees’ NI. To avoid this, you could leave the decision on how to allocate tips up to your staff or an appointed person e.g. restaurant manager.
The simple solution would be to allow employees to receive and keep tips direct from customers as in this situation NI isn’t payable.