The discussion around tips in UK hospitality has been escalating in recent years, especially with legal changes reshaping the framework around how tips are handled. The Employment (Allocation of Tips) Act 2023 came in two years ago, formalising legal requirements for handling tips and gratuities. There is still a lot of confusion surrounding tips and service charges, especially when it comes to tax on tips.
So, are tips taxable income in the UK? In short, yes, but the way they are taxed depends on how tips are processed through the business. Here is why:
PAYE
Tips and gratuities are always liable to PAYE (income tax). This doesn’t change, even if your business uses a Tronc system. The Tronc system that your business uses should be registered with HMRC as an external PAYE scheme, and will deduct PAYE on these amounts on your behalf.
If your employer pays your tips and service charges through payroll as wages or salary, they will deduct these amounts on your behalf. In the case of cash-in-hand tips, it becomes your responsibility to declare these amounts to the HMRC. See our guide here.
NICs
Whether or not tips and service charges are liable to NICs depends on whether or not your business/the business you work for uses a Tronc system or not.
Without a Tronc
If your business is not using a registered Tronc system, and pays your tips and gratuities as part of payroll, both you and your employer are liable for tips on these amounts. This is an NIC rate of 8%. They will be taxed as part of your regular payroll, which should be seen on your payslip when you receive it.
With a Tronc
If your business uses a registered Tronc system, you are exempt from paying NICs on tips and gratuities under HMRC regulations. This saves you 8% on every tip amount. However it is important to note that even with a Tronc system in place, these amounts are still liable to PAYE. A Troncmaster will detail all of this on your separate Tronc payslip.
