Tips received at work do not count towards your earning for the purposes of the National Minimum Wage. However, you are still required to pay Income Tax on these tips and may also need to pay National Insurance.
The person who is responsible for reporting the tax, and whether National Insurance is payable, depends on how the customer provided the tip and how tips are managed at your workplace.
Tips can be paid:
- directly from a customer in cash or electronically, for example through a mobile app;
- as part of your pay packet from your employer; or
- through a separate system for managing and sharing out tips at your workplace (known as a ‘tronc’).
The Department for Business and Trade together with the Department for Business, Energy & Industrial Strategy published A Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges during October 2009.
Employers are not legally required to follow the Code of Practice, but if they do they should have a policy on tips that includes information on:
- how tips are distributed or shared;
- the name of the person responsible for managing tips (if there is one);
- if tips paid directly to staff members by customers are treated differently;
- any deductions taken from tips; and
- what happens during leave, for example holidays, sick leave, parental leave.
Please note, it is illegal for an employer to pay wages ‘cash in hand’ without deducting the required tax and National Insurance contributions.