17 Jul Are Tips Taxable?
YES. Sorry to be the bearer of bad news! As an employer, any staff you employ in your hairdressing salon will have to pay income tax on tips they receive, and national insurance sometimes too, it depends on who actually receives the tip and how it is actually received.
Here’s our 5 Top Tips all about…wait for it…tips!
1. Cash tips paid directly to your staff
Here’s a little good news! If your staff receive cash tips directly from customers, they have to pay tax on them but not national insurance. If they complete a Self Assessment tax return, they need to include the tips on it. If they don’t fill out a tax return then HM Revenue and Customs (HMRC) will estimate their tips based on information from you as their employer.
HMRC will give you a tax code so that any tax is collected through the payroll and deducted from staff wages before they get them.
2. Tips included in card payments
If your customers include a tip when paying by card, which is intended for the member of staff who provided the service, the tip is paid directly to you, the employer. You, as the employer, are then responsible for making sure income tax is paid through the PAYE system.
Sometimes the tips are pooled together and shared out – this is called a ‘tronc’. The person who looks after it is called the ‘troncmaster’ and they are responsible for making sure income tax is paid. You have to tell HMRC if there’s a tronc and who the troncmaster is.
As the employer, if you decide how the tips are shared out, national insurance is due as well as tax. You’re also responsible for making sure it’s paid through PAYE.
You’ve had a really busy month at the salon and you’ve decided to reward your staff with a bonus as a sign of appreciation for their hard work. Bonus payments are treated as part of your member of staff’s pay and they will pay tax and national insurance on the amount paid to them through PAYE.
Tips are outside the scope of VAT when genuinely freely given by customers. It doesn’t matter if they’re paid by cash or card, they’re not subject to VAT.
5. Tax Credits
Any tips received by staff will be considered as income for tax credit purposes. HMRC now uses the information provided by employers on their Real Time Information PAYE submissions as part of the tax credits renewals process. These submissions do not show cash tips, so unless staff declare these themselves, it is possible that their tax credits award will be too high which could result in recoverable overpayments and possibly a penalty.