Is tipping common in your line of work? Are you working in the UK or Ireland? Here’s what you need to know about tipping and taxes.
So, the big question is: Are my tips taxable?
And the short answer is yes… but how are they taxed and what are the differences between Ireland and the UK when it comes to the taxation of tips?
Hairdressers, tour guides, taxi and delivery drivers, waiting staff, and croupiers; are all professions where tipping is customary and in some establishment’s compulsory...
What counts as a tip?
- Cash you receive at the end of a shift or from a customer
- Part of your pay packet
- A pooled amount of cash divided and shared among all staff. The official term is a ‘tronc’ and the person in charge of it is a ‘troncmaster’
Unlike the UK and the US, tipping in Ireland is a big mish-mash of different rules set in place by the individual establishments – in other words – it’s not regulated.
What should happen is a similar system to the UK where the tips are pooled and divided equally amongst the staff and a ‘troncmaster’ takes charge of making sure this income is taxed correctly. There should be fair, reliable systems in place and the tips should then be taxed accordingly through payroll.
How Irish tips are taxed
Instead, cash tips are usually divided up amongst the staff and it is their responsibility to make sure they pay tax on their tips. In the case of card payments or service charges, this income is taxed through payroll by your employer. If you earn any extra income outside of your PAYE income in Ireland, you must declare it so if you’ve received cash tips throughout the year, you must keep a record and declare it on a Form 12. Employees in Ireland are exempt from paying VAT on tips. This income is taxed through payroll by your employer.
Everything is kind of up in the air when it comes to our tipping system, workers are not protected by any legislation meaning their employers can keep their tips if they like. The problem is that the ownership of tips is not written into any legislation here meaning employers can take the tips if they please. This can go either way as some restauranteurs give their staff tips “off the books”. This works mainly for cash tips because when you tip via card transaction, the bank and Revenue take a cut automatically.
If you earn any extra income outside of your PAYE income in Ireland, you must declare it so if you’ve received cash tips throughout the year, you must keep a record and declare it on a Form 12. Employees in Ireland are exempt from paying VAT on tips.
Lack of regulation on tipping in Ireland
All in all, the UK are way ahead of Ireland when it comes to the regulation of tipping and tax, however it seems here in Ireland there is a reluctance to bother with legislation and regulation in this area. While it was up for debate briefly The Irish Low Pay Commission advised that it’s better to avoid trying to regulate tipping for two reasons; they don’t believe there’s enough evidence of the negative effect it has on workers to warrant the amount of money they’ll spend on introducing legislation and they believe it will negatively affect the wages of low paid workers since they may be losing out on extra income through taxation.
This was stated in a report released by the Low Pay Commission last February. They concluded that tips could not be used as a reckonable component for calculating the National Minimum Wage and were not considered wages under the Payment of Wages Act.
This was in response to a proposed change in legislation. After it was revealed that The Ivy on Dawson Street was withholding tips from their staff, everything erupted leading to protests and customers boycotting the establishment. Soon after, Sinn Fein passed the passed the committee stage in the Seanad to ensure workers receive 100% of their tips. This new law would make it illegal for employers to withhold tips from their employees. Tipping policy must also be displayed on the menu so that there is transparency for customers. Only credit card tips will be withheld by the employer who will make sure they’re taxed correctly.
When it comes down to it, they don’t believe that regulation of tipping is worth the ‘administrative and compliance costs’. There are also issues with ‘enforceability’ because the process of tipping it informal in nature.
In the UK, you must pay Income Tax on your tips and National Insurance contributions too.
How tax is worked out in this scenario comes down to who the tips are given to and who decides how they’re shared out. Their system is different to Ireland, if you fail to declare your tips, the HMRC will estimate the amount and deduct tax from your income
Tips paid directly to you
If you receive a tip in the form of cash from a customer, you have to pay tax on the amount but not National Insurance.
You must fill in a Self-Assessment tax return and include your accumulated tips on it. If you don’t fill this out, HM Revenue and Customs (HMRC) will estimate the amount based on information from your employer. HMRC will give you employer a tax code so they can collect tax through the Pay As You Earn (PAYE) system. This is where tax is deducted directly from your pay check before you receive it.
Tips included in card or cheque payments
If your employer pays this kind of tip directly to you, it is your employer is responsible for making sure that Income Tax is deducted through PAYE.
In the case of a ‘tronc’, the ‘troncmaster’ is responsible for making sure Income Tax is paid.
If it is your employer who decides how the tips are divided and shared, they must make sure that National Insurance is paid as well as tax, again through PAYE.
Sometimes a service charge is added to the bill before it’s given to the customer. In the case that the charge is compulsory, it’s not a tip and is treated the same as your wages if your employer gives it to you.
If it’s voluntary, you must pay tax and National Insurance just like regular tips.
Bonuses are taxed as part of your pay meaning you pay tax and National Insurance on them.
Can you skip paying tax on tips if you don’t bother filing your tax return?
No, if you fail to file, HMRC will be alerted and they will then make an estimate based on the information you and your employer have given them. This is when they will send the tax code we mentioned earlier.
If you’d like help with filing your UK Self-Assessed taxes or you would like a UK or Irish tax refund, contact Taxback.com today and we’ll check for any reliefs or expenses you may be due and help you get the most out of your tax return.
If you have any questions or you'd like to find out more about filing your tipping taxes the easy way, contact Taxback.com today. Our team of friendly, qualified tax experts are available 24/7 via our Live Chat service.