One of your employees has shown you new guidance which says you shouldn’t make deductions when passing on customer tips. Does this refer to PAYE tax and NI?
New rules
After a long wait, new rules for the allocation of customer tips finally took effect on 1 October 2024. Broadly, they say that regardless of how customer tips are paid, if as an employer you receive them on behalf of your staff you must pass them on without deductions within one month. New guidance was recently published by the Department for Business & Trade (DBT) to reflect the new rules.
Tips without deduction
The DBT’s guidance says “These changes will require employers to pass on all tips, gratuities, and service charges on to workers, without deductions”. The last two words have caused some confusion regarding the PAYE tax and NI treatment of tips etc. that employers collect.
Tip – By “without deductions” the DBT means that employers must not take any part of the tips for themselves even if this is to meet the cost of administering their collection from customers and allocation to staff. It does not refer to statutory deductions for tax and NI.
PAYE tax & NI
The tax and NI position of tips etc. has not changed as a result of the new rules. They may or may not be liable to PAYE tax and NI depending on the method of payment.
Direct payments
Where a customers leave a cash tip collected directly by the employee, no PAYE tax or NI needs to be accounted for. Instead, the employee must declare their tips to HMRC (usually through self-assessment) and pay tax, (but not NI) on them.
Indirect Payment
Where the tip is added to a customer’s bill and so paid to the business (the employer), when it’s passed to the employee the employer must treat the payment as if it were wages and deduct PAYE tax and NI. The employer must also account for Class 1 employers’ NI.
New rules say that from 1 October 2024, employers must pass on tips etc. they collect for their employees within one month. No deductions can be made from the tips by the employer except statutory amounts, including PAYE tax and NI contributions.
Content taken from – Indicator – FL Memo Ltd