Tax on Tips and Gratuities in the UK: What Hospitality Workers Need to Know
If you work in hospitality, beauty, taxi driving, or any other service industry where customers leave tips, those tips count as taxable income. HMRC is clear on this: tips and gratuities are subject to Income Tax, and in some circumstances they also attract National Insurance. The 2023 Employment (Allocation of Tips) Act also introduced new rules requiring employers to pass all tips to workers without deduction — and it has sharpened HMRC's focus on this area. Here is what you need to know.
Are all tips taxable?
Yes. Every tip, gratuity, or service charge you receive as a worker is taxable income, regardless of how it is paid:
- Cash tips handed directly to you by the customer.
- Card tips added to a bill and passed on by your employer.
- Tips distributed through a tronc (a formal pooling and distribution system).
- Service charges collected by the employer and shared among staff.
The only exception is a genuinely voluntary, direct cash gift from a friend or family member who happens to be a customer — HMRC would not realistically treat this as taxable. But commercial tips from members of the public are always taxable.
How are tips taxed?
How tips are taxed depends on who collects and distributes them:
1. Tips paid directly to you by customers (cash or card, kept by you)
If a customer gives you a tip in cash and you keep it, the employer has no involvement. You are responsible for declaring it to HMRC. You must either register for Self Assessment and include the tips in your return, or contact HMRC directly to arrange collection through your PAYE tax code. No National Insurance is due on tips in this category — NI is only due on tips processed through payroll.
2. Tips collected and paid to you by your employer through payroll
If your employer collects card tips and pays them to you via the payroll, both Income Tax and employee National Insurance are deducted by the employer in the normal PAYE way. You do not need to do anything separately — the deductions appear on your payslip.
3. Tips distributed through a tronc
A tronc is a formal arrangement operated by a "troncmaster" (often a senior employee or independent administrator) who pools tips and service charges and distributes them among staff according to an agreed formula. Income Tax is deducted by the troncmaster through a separate PAYE scheme. Crucially, tips distributed through a properly operated tronc do not attract National Insurance. This is why many hospitality businesses use troncs — it saves employees NI and saves the employer employer NI.
The Employment (Allocation of Tips) Act 2023
From 1 October 2024, the Employment (Allocation of Tips) Act 2023 requires employers to pass 100% of tips, gratuities, and service charges to workers without any deductions (including admin fees). Employers must also have a written tips policy and keep records of tip allocation for three years. Workers can request information about how tips are distributed and can bring claims to an Employment Tribunal if tips are withheld.
This does not change the tax treatment — tips remain taxable — but it means employees are now entitled to receive the full gross amount, with tax then deducted through the appropriate channel.
What happens if you do not declare tips?
HMRC has significant data on tipping patterns in the hospitality sector and uses compliance checks targeting businesses and employees in sectors with high cash or card tipping. Undeclared tips are treated as tax evasion. HMRC can investigate up to four years back (20 years for deliberate non-declaration) and will charge the unpaid tax plus interest plus a penalty of up to 100% of the tax due. The safest approach is always to declare.
How to declare tips through Self Assessment
If you have cash tips not processed through payroll, you need to register for Self Assessment with HMRC (if you are not already registered). On your Self Assessment return, declare the tips under "other taxable income." Keep a simple log of tips received — even a notes app entry after each shift will provide sufficient evidence if HMRC ever queries your return.
Frequently asked questions
Do I pay National Insurance on cash tips I receive directly from customers?
No. Tips paid directly to you by customers — with no employer involvement in collection or distribution — are subject to Income Tax only, not National Insurance. NI applies only to earnings processed through an employer's payroll.
My employer has been deducting a percentage of card tips as an admin fee. Is that legal?
From 1 October 2024, no. Under the Employment (Allocation of Tips) Act 2023, employers cannot make any deductions from tips, including admin fees. If your employer is still doing this, you can raise a grievance and ultimately bring an Employment Tribunal claim for the withheld amounts.