Tips Are For Life, Not Just For Christmas
But how are they taxed?
Christmas is a time for giving, but for restaurant and bar staff tips are an all year round hope! The trouble is, like everything else in life, nothing is as certain as death and taxes and yes, the taxman wants his share of the tips as well ...
When you accept tips, the way you handle them depends on what Tax and NI is due.
copyright: nordroden / 123rf stock photo (licensee)
The tax treatment of tips depends on who receives them and who distributes them to the staff. If a customer tips directly to an employee and they don't share but keep all of the tip, that employee has an obligation to report the tips to the taxman on their personal tax return.
"They will pay income tax on the tips, but won't have to pay national insurance!"
If the tips are pooled and shared, the tax treatment depends on who is doing the pooling and sharing. If the employer collects and shares the tips then the employer has to include them in their PAYE scheme. Income tax and national insurance are deducted along the way.
If the tips are pooled and shared by someone else, for example, the manager, then we have slightly different rules and some great terminology.
The person who pools and shares the tips is called a Troncmaster and the pool is called a Tronc. Interestingly the word 'tronc' is derived from the French word for collecting box. The Troncmaster has to operate a separate PAYE scheme to record the payment of tips out through the Tronc.
The great news for the employees is that although tips paid out through a Tronc are charged to income tax, they are not automatically charged to National Insurance!
"Normally, a Tronc doesn't pay national insurance unless the employer decides who gets what instead of the Troncmaster!"
Tips and gratuities are fascinating subjects as far as tax is concerned. If you'd like to talk about tipping in your restaurant or bar, then do call me at JVCA on 0333 335 0422 and let's arrange a chat at my offices in Cranfield, Milton Keynes.
Until next time ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.