The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
Tips and commission are both varieties of payment that employees may receive in addition to their regular wage or salary payments. Tips, in particular, are often paid by a customer or client rather than by the employer. This note also covers the position regarding the distribution to employees of service charges applied to customers’ bills in lieu of gratuities.
The starting point is that both tips and commission, however paid, are taxable as earnings in the hands of the employee. In the case of tips, there are a number of ways in which they can be paid and a number of routes they can take before ending up in the hands of the employee. It is the handling of the payments before they reach the employee that determines whether the payments are also subject to National Insurance contributions (NICs), whether they are subject to PAYE and, if so, who should operate PAYE in respect of the payments.
Tips and commission paid in vouchers rather than cash are still taxable as earnings.
As mentioned above, there are a variety of ways in which tips may be handled and an employee may receive tips by a number of routes in the same employment. The tax and NICs treatment will apply according to the method of handling. It will not be unified just because all the tips relate to the same employment.
As there are different treatments depending on how the tips are handled, methods for ensuring that staff receive the highest take-home amount have been devised. Troncs are a way to ensure that additional NIC is not incurred through the administration of the tip by ensuring that a person that is not the employer handles and distributes the tips. This method is
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