Q: We have just opened a restaurant and have several staff on payroll. Over the festive season we are expecting business to pick up and the tips received to increase. What will the tax treatment be on the tips received?

A: The way the tips are treated will depend on who receives them and who distributes them.

If an employee receives tips from a customer and keeps them, there will be no national insurance to pay. They will have an obligation though to notify HMRC and there will be tax to pay.

If the tips received are pooled then it will depend on who distributes them as to how they are treated. If they are given to the employer, they will be taxed via the PAYE system and NIC will be deducted at the same time. If they go to a third party in charge of the tips, i.e. into a ‘tronc’, the troncmaster will operate the PAYE on distribution. However, if the troncmaster decides where the tips go there will be no NIC, but if the employer makes the final decision, NIC will be due.

In association with Croner Taxwise