Tax guidance on electronic payment of tips

HMRC’s guidance on the taxation of tips, gratuities, service charges, and troncs has been updated to include information on how to manage electronic payments.

The guidance clarifies that an electronic payment does not alter any of the fundamental principles for determining how tax is to be accounted for on tips and whether a national insurance contributions (NIC) liability arises.

When an employer collects tips and gives them to employees, the company must subtract income tax and national insurance contributions from these payments.

When customers tip directly to employees, it is the employee’s responsibility to report these earnings to HMRC. Any taxes owed will most likely be recovered through a change in the employee’s tax code. Customers’ direct payments are not subject to NIC.

Payments done with ‘troncs’ have their own set of rules (a special pay arrangement used to distribute tips, gratuities, and service charges where a person other than the employer is responsible for sharing the amounts). These are also covered in HMRC’s new guidelines.