Answers · UK 2025/26
How are tips and gratuities taxed in the UK in 2026?
Tips received by employees are subject to Income Tax and potentially National Insurance. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 requires employers to pass all qualifying tips to workers in full, without deductions. Mandatory service charges already added to bills are always subject to PAYE; cash tips paid directly to workers are also taxable but may be declared via Self Assessment.
Full answer
The tax treatment of tips depends on how they are received and distributed. The Employment (Allocation of Tips) Act 2023 (in force from 1 October 2024) changed the rules on how tips must be allocated, but the tax position has always been clear: tips are earnings and are taxable. **Types of tips and their tax treatment:** **1. Mandatory service charge (added to the bill):** If the employer adds a service charge to the bill and controls how it is distributed, it goes through payroll as normal earnings -- subject to Income Tax via PAYE and employee and employer National Insurance. **2. Discretionary tip or service charge via card/system controlled by employer:** The employer collects the tip and distributes it. Again, subject to Income Tax and NI through payroll. Before the 2023 Act, some employers deducted administration fees before distribution -- the Act now prohibits this. **3. Cash tips paid directly to a worker (not passing through the employer):** The worker must declare these on a Self Assessment tax return. They are subject to Income Tax at the marginal rate. Generally no Class 1 NI (employee or employer) is due on cash tips paid directly by a customer. **4. Tronc schemes:** Many hospitality businesses operate a tronc -- an independent payment arrangement run by a "troncmaster." Tips passed through a properly run tronc where the troncmaster distributes independently are subject to Income Tax (via PAYE run by the troncmaster) but NOT employer or employee NI, as they are not earnings paid by the employer. The 2023 Act requires troncmasters to operate independently. **The Employment (Allocation of Tips) Act 2023:** - In force from 1 October 2024 - Employers must pass 100% of qualifying tips to workers (no employer deductions for admin costs) - Tips must be distributed fairly and in line with a written tips policy - Workers can request a record of tips and complain to an Employment Tribunal if tips are not correctly allocated **Practical note:** HMRC operates an industry-wide arrangement with sectors such as hairdressing and hospitality to agree how cash tips are reported, recognising the practical difficulty of tracking small cash amounts.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.