Is tipping common in your line of work? Are you working in the UK? Here’s what you need to know about taxation of tips.
So, the big question is: Are tips taxable?
The short answer is yes… but how are they taxed in the UK?
Hairdressers, tour guides, taxi and delivery drivers, waiting staff, and croupiers - these are all examples of professions where tipping is customary and in some establishments even compulsory!
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Taxation of Tips in the UK
In the UK, you must pay Income Tax on your tips and National Insurance contributions too.
How the taxation of tips is worked out in this scenario comes down to who the tips are given to and who decides how they’re shared.
If you fail to declare your tips, the HMRC will estimate the amount and deduct tax from your income.
How tips are paid
You could get your tips as:
- Cash at the end of a shift or from a customer
- Part of your pay packet
- An amount that is pooled and then shared between all staff – this is known as a tronc and the person looking after it is called a tronc master.
Tips paid directly to you
If you receive a tip in the form of cash from a customer, you have to pay tax on the amount given but not National Insurance.
National Insurance is a contribution you make if you’re over 16 and are either an employee earning above £183 a week self-employed and making a profit of €6,475 or more a year.
You must fill in a Self-Assessment tax return and include your accumulated tips on it. If you don’t fill this out, HM Revenue and Customs (HMRC) will estimate the amount based on information from your employer.
Taxback can help you file your UK self-assessment tax return and get proper taxation on your tips.
HMRC will give your employer a tax code so they can collect tax through the Pay As You Earn (PAYE) system. This is where tax is deducted directly from your paycheck before you receive it.
We can help you claim your PAYE tax refund.
Tips included in card or cheque payments
If your employer pays this kind of tip directly to you, it is your employer’s responsibility to make sure that Income Tax is deducted through PAYE.
In the case of a ‘tronc’, the ‘tronc master’ is responsible for making sure Income Tax is paid.
If it is your employer who decides how the tips are divided and shared, they must make sure that National Insurance is paid as well as tax, again through PAYE.
Sometimes a service charge is added to the bill before it’s given to the customer. In the case that the charge is compulsory, it’s not a tip and is treated the same as your wages if your employer gives it to you.
If it’s voluntary, you must pay tax and National Insurance just like regular tips.
Bonuses are taxed as part of your pay meaning you pay tax and National Insurance on them.
Cash in-hand wage payments
Being paid your wages cash in hand is illegal. This is because employers will be paying your wages without deducting tax and insurance contributions.
You could risk losing your employment rights if you accept cash-in-hand payments.
Don't forget, Taxback can help you claim your tax refund in the UK.
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Can you skip taxation of tips if you don’t bother filing your tax return?
No, if you fail to file, HMRC will be alerted and they will then make an estimate based on the information you and your employer have given them. This is when they will send the tax code we mentioned earlier.
If you’d like help with filing your UK Self-Assessed taxes or you would like to claim a UK tax refund, get in touch with Taxback today - we’ll check for any reliefs or expenses you may be due and help you get the most out of your tax return!
If you have any questions or you'd like to find out more about filing your taxation of tips the easy way, contact Taxback.
You can use our tax return calculator to see how much tax you could be due back.
Our team of friendly, qualified tax experts are available 24/7 via our Live Chat service.
The average UK tax rebate is £963
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