NIM02965 - Tips, gratuities and service charges: income tax and pay as you earn

Section 62 of the Income Tax (Earnings and Pensions) Act 2003

Regulation 100 of the Income Tax (Pay as You Earn) Regulations 2003 (SI 2003 No. 2682)

There is no income tax equivalent of the NICs gratuity disregard. All tips, gratuities, and service charges fall within the definition of earnings in section 62 of ITEPA 2003. See EIM07090

If an organised arrangement exists for tips to be shared among employees by a person who is not the principal employer, the principal employer must notify HMRC about the arrangement. When this is done a PAYE scheme may be set up for the arrangement (usually known as a tronc) for the purpose of operating PAYE on the tips. Where a ‘tronc’ PAYE scheme is opened the person held responsible for compliance with PAYE legislation is the person who shares out the tips (usually known as the ‘troncmaster’). This is relevant when trying to establish facts to determine whether condition 2 of the gratuity disregard applies (NIM02922). For more guidance about PAYE see PAYE72080.

Where a tip is paid directly by customers using either traditional methods such as leaving them on a table or using digital means such as mobile apps and individual employees keep them without any involvement from the employer, then PAYE does not apply. Tax will be due on these amounts, but no NICS will be due.

It is the responsibility of the individual employee to advise HMRC of the amounts received by either including the amounts of the tips in their Self-Assessment return or reporting the amount of the tips received, to HMRC. The tax will usually be recovered by an adjustment to the employee’s PAYE tax code.

If the employee does not fill out a tax return then they must report the amount of tips they have received. They can do this either online via the Personal Tax Account or calling HMRC’s Income Tax enquiries line