GUIDELINES ON SERVICE CHARGES AND TIPPING
The UK Government has announced that it is to consult over tipping with the aim of preventing tips, service charges and gratuities being counted as part of the National Minimum Wage. At the current time, however, the following guidelines apply:
Tips paid directly to the employee – if customers give cash tips or gratuities directly to waiters or other employees, they do not count towards the minimum wage. While they are taxable, they do not come within the scope for National Insurance but it is up to the employees to declare this income in their annual tax returns. It is recommended that guidance is given to employees about this and that they are encouraged to keep a written record of all the tips they receive so that they can comply with the tax requirements. In the case of those who do not have to fill in a tax return at the end of the Tax Year, the Inland Revenue may estimate the amount of tips an employee is likely to receive and allocate a tax code that reflects this through PAYE. It is important to maintain a written record of tips in order to check this coding is correct and to be able to challenge it if necessary.
Cash tips paid through the business - if tips or gratuities are operated through the business payroll in any way, they do count towards the National Minimum Wage and are taxable through the PAYE scheme. This includes tips paid via a 'tronc' (an independent tips distribution scheme which shares out the tips amongst staff) if the employer decides how the tips should be shared. If, however, the employer doesn't decide or influence how the money is shared out, in other words it is distributed via an independent tronc scheme, NIC is not due but the employer has to tell HM Revenue & Customs that a tronc scheme exists and who the troncmaster is.
Tips paid through the business as part of a cheque or card payment – In cases where a service charge is added to a bill – or voluntarily added by the customer – but paid as part of a cheque or card payment, the European Court of Human Rights has ruled that this belongs to the employer and cannot be used to make up the National Minimum Wage.