Service Charge Optional

The tax and national insurance (NI) treatment of tips, gratuities and service charges in the catering and related industries is notoriously complex. The Revenue is well aware that tax and NI is not always properly accounted for and has started to look into this matter. We summarise briefly the correct tax and NI treatment below.

Where the customer pays a tip direct to the employee the responsibility for dealing with that tip rests with the employee. They should declare the amounts received to the Revenue and usually the tax will be collected through the employee’s PAYE code. The employer has no PAYE responsibility and there is no NI due.

If the employer leaves the tax position to the employee to sort out, it is prudent that this is reflected in the contract of employment, so that it is clear that the responsibility rests with the employee and not the employer.

However in many situations the employer will collect the tips, particularly where tips are added to the credit card bill or where the employer makes a service charge. If the employer organises the distribution of tips to staff, the employer has an obligation to operate PAYE on payment of the tips to the employees. In addition NI (both employers’ and employees’) is due. The plus about this route is that the tips can count towards the employer’s requirement to pay the National Minimum Wage.

A tronc is a special arrangement used to pool and distribute tips. It is usually operated by a troncmaster who is responsible for operating a PAYE system independently of the employer’s scheme. NI will not be due so long as there is no contractual entitlement to a share of the tips and the employer does not determine, directly or indirectly, their allocation.

The Revenue has published a revised guide on the subject - booklet E24(2005). Please talk to us if you have any questions on anything we have raised in this article.