All tips received by an employee are taxable. Tips distributed by an employer or a Tronc arrangement will pass through the PAYE system and deductions for tax made accordingly.
Tips made direct by customers to staff do not have to be included in the PAYE records - but the employee should still declare them to HMRC and pay tax usually by adjustment to the individuals tax code number.
National Insurance is a more complex issue.
- Tips paid direct to an employee by customers, and retained by employee - no Class 1 NIC contributions are due.
- Tips paid to employee via an organised Tronc - no Class 1 NIC contributions due. This is so even where the tips go to meet a contractual obligation, or to meet statutory requirements such as the National Minimum Wage. This is a change of view by HMRC and may have led to NIC overpayments in certain cases.
- Tips paid to employee by the employer - as for instance when compulsory service charges are added to bills and redistributed by the employer as wages. In these cases Class 1 NIC contributions are payable.
National Minimum Wage considerations
From 1 October 2009 tips no longer count as part of NMW if paid by the employer as part of wages or where the employer is the troncmaster.
There is no change to the position where tips are paid direct by customer or via a non employer organised Tronc. These have always been outside of the NMW calculation.
There is no doubt that this is still a complicated and contentious area of taxation.
Ignore at your peril.