Who is responsible for paying tax on tips?

Tipping in the hospitality industry has always been an integral part of the service. Customers who appreciate the service that has been provided, leave tips for their staff either as cash or as additional monies on a card payment.

In most hospitality establishments, tips are left for waiting staff and although most customers may now pay for meals by credit card, a substantial number of those customers still leave a cash tip. There may be a belief that a cash tip will go to the individual, whereas a tip on a card may get ‘swallowed’ by the business.

But whichever way the tip is made, who is responsible for paying the tax and/or declaring it to HMRC?

The employee is responsible …

If a cash payment is left and the waiter pockets that tips without pooling the tip it is that employee’s responsibility to report the tip to HMRC. The individual must then pay tax on the amount of the tips either through their tax code or through the self-assessment system.

The employer is responsible …

If the employer pools all of the cash tips and decides who receives the tips and pays the tips to the employees, then the employer is responsible for the tax. The employer must also account for employees and employers NIC. This results in a a significant amount of the tip is therefore taken in tax and NIC.

The Troncmaster is responsible …

If a Troncmaster is appointed, independent of the employer and is solely responsible for the allocation and payment of tips, income tax is deducted and paid by the Troncmaster to HMRC . A separate Tronc PAYE scheme is required to deduct the tax and pay to HMRC. There are no NIC deductions.

A tronc scheme, run by a troncmaster is by far the most tax efficient way of managing tips for both the employee and employer.