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HMRC internal manual

National Insurance Manual

Tips, gratuities and service charges: Contractual payments


Any payment made by an employer where he has a legal obligation to make the payment in question, such as part of a contractual arrangement or undertaking, cannot be accepted as being a gratuity. If, however, the payment is in respect of a gratuity (NIM02925), there may be circumstances where the payment can be disregarded from earnings so that Class 1 NICs are not due.

A contractual payment is any payment made to an employee as part of an agreement between the employee and their employer, such as

  • any payment that forms part of the terms and conditions of the employment
  • a payment that is promised, guaranteed or underwritten by the employer even if the payment (or part of it) is paid by a third party.

If gratuities are paid to the employer, the subsequent payment from the employer to the employee can still be in respect of a gratuity. If a contractual payment is in respect of a gratuity, NICs are not due if the employer does not directly or indirectly allocate the payment to the employee (NIM02922).

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Employer makes ‘top-up’ payments

Where there is an agreement that the employer will make top-up payments, if the amounts funded from tips, gratuities and or service charges do not reach a certain level, those top-up payments are contractual earnings. The payments are not gratuities or payments in respect of gratuities. So, such payments cannot be disregarded from earnings under the gratuity disregard (NIM02905).


The facts

John, the proprietor of a restaurant, agrees with his employees a minimum amount each will receive in tips. He promises to make up any shortfall if the tips do not reach the minimum amount when he distributes all the tips at the end of each week.


Where John has to make good his promise, he is meeting a contractual obligation out of his own pocket and as these payments are neither ‘tips’ nor ‘in respect of’ tips, NICs will be due on the payment.

Where John does not have to make good his promise the payments he makes derive from the tips paid by the customers, so are payments in respect of tips.

John satisfies neither of the conditions in the gratuity disregard (NIM02905) because he decided how the tips would be allocated and pays the amounts to the employees. So, NICs are also due on these payments.