Are Tips Taxable?

Updated on May 11, 2022

YES. Please accept my apologies for having to tell you the dreadful news! Depending on who receives the tip and how it is really collected, your hairdressing salon’s employees may be required to pay income tax or national insurance on the money they receive.

The following are our top five suggestions for…

Here they come…the hints!

1. Cash Tips Paid Directly To Your Staff

There’s some wonderful news to report! Cash tips that clients provide to your employees are subject to taxes but not national insurance. They’ll have to mention the advice in their tax return if they do it on their own. It’s your responsibility as their employer to report their tips to HM Revenue and Customs (HMRC) if they don’t do so themselves.

You’ll get a tax number from HMRC so that any taxes you owe can be withheld from your employees’ earnings before they get them.

2. Tips Included In Card Payments

Paying a gratuity to a member of staff when they pay with a credit or debit card is done directly by the consumer, not you, the employer. PAYE is therefore your responsibility, as the employer, to ensure that income tax is paid.

A ‘tronc,’ or tip jar, is a container used to collect and distribute tips. The ‘troncmaster’ is responsible for ensuring that income tax is paid, and they are referred to as such. A tronc must be reported to HMRC, and you must identify the troncmaster.

Tax and national insurance must be paid if you select how tips are distributed as an employer. Make sure it gets paid through PAYE as well.

3. Bonuses

You’ve had a busy month at the salon, so you’ve decided to show your appreciation for their efforts by awarding a bonus to the team. Bonuses are taxed and nationalised as part of a worker’s salary, and they’ll have to pay those taxes and fees through PAYE.

4. VAT

Tips are not subject to VAT if they are offered voluntarily by customers. Regardless of whether they’re paid in cash or by credit card, VAT is not applied.

5. Tax Credits

For tax reasons, any tips received by employees will be counted as income. When it comes to tax credit renewals, HMRC now utilises data from employers’ Real Time Information PAYE filings. Staff may be awarded tax credits that are too high because of the absence of cash tips, which could lead to recoverable overpayments and a possible penalty.