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Understanding Tips at Work and Their Tax Implications
Tips received at work do not contribute to your earnings for calculating the National Minimum Wage. However, you are still required to pay Income Tax on these tips, and depending on the situation, National Insurance contributions may also apply.
Who is responsible for reporting these taxes, and whether National Insurance must be paid, depends on how the tip is given by the customer and how tips are managed at your workplace.
There are different ways tips can be received:
- Directly from a customer, either in cash or electronically, such as through a mobile app.
- Included as part of your salary from your employer.
- Through a separate system that manages and distributes tips at your workplace (commonly known as a ‘tronc’).
In October 2009, the Department for Business and Trade, along with the Department for Business, Energy & Industrial Strategy, published a Code of Best Practice on Service Charges, Tips, Gratuities, and Cover Charges.
While employers are not legally obligated to follow this Code of Practice, if they choose to do so, they should have a clear policy on tips that outlines:
- How tips are distributed or shared among staff.
- The name of the individual responsible for managing tips (if applicable).
- Whether tips given directly to employees by customers are treated differently.
- Any deductions made from tips.
- What happens to tips during periods of leave, such as holidays, sick leave, or parental leave.
It’s important to note that it is illegal for an employer to pay wages ‘cash in hand’ without deducting the necessary tax and National Insurance contributions.
