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Tips and Tax

Do I have to pay tax on my tips?

The bottom line is you will have to pay income tax on any tips you receive, and may also have to pay National Insurance.

Who reports the tax and whether you pay National Insurance depends on:

  • · how the customer paid the tip
  • · how tips are managed at your workplace

What if the tips are paid directly to me?

If you receive the tips directly from the customer then you must report them to HMRC. This can be done in the following ways:

You must report tips in one of the following ways:

  • · you can report it on your Self Assessment tax return if you do one
  • · through your personal tax account online
  • · or by calling HMRC

HMRC will change your tax code if needed. Your employer will then deduct any tax you owe on tips when you get paid. You will not need to pay National Insurance.

If the amount you receive in tips changes substantially then you should either update your personal tax account or call HMRC. This will ensure you don’t end up paying too little or too much tax.

What about tips paid through my employer?

You do not have to report tips which have been:

  • · passed on by your employer, for example, discretionary tips customers added to their bill payments
  • · paid through a separate system for managing and sharing out tips at your workplace (known as a ‘tronc’)

Any Income Tax you owe on these tips will be deducted when you get paid.

How do service charges differ?

If a service charge has been added to the customer’s bill before it is given to the customer it is treated in the same way as your wages. This is a compulsory charge and not a tip.

If it’s voluntary service charge, you pay tax and National Insurance in the same way as for tips.

Is VAT payable on tips?

This depends on whether the tips has been given freely or is compulsory.

  • · Tips given freely by customers are outside the scope of VAT.
  • · Compulsory Service Charges are VATable at the same rate as the items supplied.
  • · Optimal Service Charges are outside the scope of VAT.
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