Tax on Tips and Gratuities in the UK 2025-26

Q: What is a tronc system?

A tronc is a separate pay arrangement used in the hospitality industry to collect and distribute tips and service charges to workers. It is managed by an independent troncmaster (not the employer). Tips distributed via a qualifying tronc are exempt from employer National Insurance but are still subject to income tax.

Q: Do I pay National Insurance on tips?

It depends how the tips are paid. Tips paid directly by customers to workers (cash in hand) are subject to income tax but NOT National Insurance. Tips paid through an employer or collected by the employer before distribution are subject to both income tax and NI. Tronc distributions are exempt from employer NI but not employee NI in some circumstances.

Q: How do I declare tips to HMRC?

If your tips are not handled through PAYE (e.g. cash tips you receive directly), you must declare them to HMRC. You can do this via Self Assessment, or if you do not file a return, by contacting HMRC directly. HMRC can adjust your PAYE tax code to collect tax on regular tips.

Tips are taxable income in the UK, but the rules around income tax and National Insurance vary depending on how tips are collected and distributed. This guide explains the rules for hospitality and service workers.

Are Tips Taxable?

Yes. HMRC considers all tips, gratuities, and service charges received in connection with your work to be taxable employment income. Whether the tip is cash from a customer, added to a card payment, or distributed through a tronc system, it must be declared and taxed.

The key distinction in how tips are taxed is whether they pass through the employer's hands or go directly from customer to worker. This determines whether both income tax and National Insurance apply, or income tax alone.

Types of Tips and How They Are Taxed

Cash Tips Paid Directly to You

If a customer hands you cash as a tip, without involving your employer, it is taxable as income but not subject to National Insurance (neither employee NI nor employer NI). You are responsible for declaring the income to HMRC.

You can do this through a Self Assessment tax return, or if you are not required to file a return, by contacting HMRC so they can adjust your tax code to collect the right amount through PAYE.

Tips Controlled by the Employer

If your employer collects card tips and then decides how to distribute them, or if tips are added to wages at the employer's discretion, the tips are treated as earnings. They are subject to both income tax (via PAYE) and National Insurance contributions (employee and employer). Your employer must include them on your payslip.

Tronc Systems

A tronc is a special arrangement common in restaurants, hotels, and hospitality venues. An independent "troncmaster", who is not the employer, collects and distributes tips according to agreed rules. Tronc distributions are:

Subject to income tax (the troncmaster operates a PAYE scheme for tronc payments)
Exempt from employer National Insurance (a significant saving for employers)
Subject to employee NI only if the employer exercises any control over the tronc distributions

This is why many large hospitality groups use tronc arrangements, it reduces the employer's NI bill and can mean slightly higher net pay for workers compared to tips processed directly by the employer.

The Employment (Allocation of Tips) Act 2023

From October 2024, employers in the UK are legally required to pass on 100% of tips, gratuities, and service charges to workers, they cannot retain any portion. Employers must also have a written policy on tips and provide workers with information about how tips are distributed. This law does not change the tax rules but does mean workers are entitled to receive all tips collected.

Service Charges

A discretionary service charge added to a bill is treated the same as a tip for tax purposes. A compulsory service charge (i.e. one that is contractually required) is treated as part of the business's revenue rather than a gratuity, and the tax treatment depends on how it is then paid out to workers.

How Much Tax Will I Pay on Tips?

Tips are taxed at your marginal income tax rate, the same rate as your other income. If your total income (salary + tips) is within the basic rate band, tips are taxed at 20%. If tips push your income above £50,270, the excess is taxed at 40%.

Example: You earn £24,000 basic salary and £3,000 in tips. Your total income is £27,000. After the £12,570 Personal Allowance, taxable income is £14,430, all taxed at 20% = £2,886 income tax. Your employer handles tax on the salary portion; you may need to declare the tips separately if they are not processed through PAYE.

Declaring Tips to HMRC

If your tips are not processed through PAYE, you must tell HMRC:

Register for Self Assessment if you have not already
Include tips in the "Other income" section of your tax return
Or contact HMRC to adjust your tax code if you are not required to file a return

Failing to declare tips is tax evasion. HMRC investigates the hospitality sector regularly and can assess back-tax plus interest and penalties if unreported tips are discovered.

Frequently Asked Questions

Are tips taxable in the UK?

Yes. All tips and gratuities received in connection with your employment are taxable as income. The method of taxation depends on whether the tips pass through the employer, come directly from customers, or are distributed via a tronc.

What is a tronc system?

A tronc is a separate pay arrangement used in hospitality to collect and distribute tips. Managed by an independent troncmaster, tronc distributions are subject to income tax but exempt from employer National Insurance.

Do I pay National Insurance on tips?

Cash tips paid directly to you by customers are not subject to NI. Tips controlled by and distributed by your employer are subject to both income tax and NI. Tronc distributions are generally exempt from employer NI.

How do I declare tips to HMRC?

If your tips are not handled through PAYE, declare them via Self Assessment or ask HMRC to adjust your tax code. Cash tips you receive directly must be declared, failing to do so is tax evasion.