The catering sector can sometimes benefit from tips received from customers and unfortunately there are some tricky tax rules which must be applied to any tips or gratuities received.
Tax is payable on income from employment and unfortunately HMRC consider tips to be income from employment.
We often see restaurants adding a service charge at the foot of a bill and it is important to check distinguish whether this charge is mandatory or discretionary.
Where the tip is mandatory and is collected by the employer by cash, cheque or card and then paid over to the staff member serving that table, the employee will have to pay PAYE on the tip.
Where tips are pooled and paid out to kitchen team, bar staff and waiting team, say in different percentages at the discretion of the employer, then that payment is subject to PAYE, employees NIC and the employer must pay employers NIC too.
Some restaurant owners use a third party to determine the split of tips between staff. Provided that the third party is makes the distribution at its own discretion and is completely separate from the employer, then national insurance is avoided.
Finally, some restaurants leave the collection of cash from customers to the waiter/waitress who looked after the table. In this situation PAYE is not deducted from the payment but the employee must declare all tips to HMRC and pay income tax on these gratuities.
Now for a nasty illustration
Imagine a mandatory £5 is added to a card payment which the employer distributes – £1 is paid in PAYE, £0.60 is paid in employees NIC and £0.69 is paid by the employer in employers’ NIC. So out of a generous tip of £5 HMRC will take £2.29!