It’s a new tax year so let’s talk tips.
If you’re wondering what the connection is between Her Majesty’s Revenue and Customs and the fiver that nice client just handed your beauty therapist, you definitely need to keep reading.
This is really important: tips are taxable. If that’s news to you then you’re not alone. Through my Salon Success Freedom programme, I meet brilliant salon owners who have never considered the tax implications of a client’s kind gesture. But of course, as with everything tax-related, ignorance isn’t a valid defence.
While the headline is simple to grasp, the reality of dealing with it needs a little more explanation.
There are three main ways of handling tips:
1. Employees receive and keep their own tips
From a salon owner’s perspective, this is the most straightforward option. Each individual is responsible for recording their own tips and making sure they pay Income Tax on them correctly.
However, that doesn’t mean you can switch off completely. It’s still down to you to ensure your entire team is aware of the requirement in advance. David Wright, a personnel advisor to Habia and a consultant on my Salon Success Freedom programme, suggests adding a relevant paragraph to your workplace rules. It also makes sense to spell it out for every new starter and to gently remind existing employees from time-to-time.
2. Employees pool their tips and share them out
This is where things can get a bit cloudier. Collecting tips for distribution among staff is called a tronc and wherever there’s a tronc, there needs to be a troncmaster – a single person responsible for divvying up the pot.
Once everyone agrees who the troncmaster will be, it’s down to you as business owner to update HMRC. This is because the troncmaster makes sure the whole group pays the appropriate Income Tax through a specially created PAYE scheme in their name.
3. Tips are pooled and you share them out
You might decide this is best left to your team because by trying to be a kind boss and acting as the troncmaster on behalf of your hard-working staff, tips become subject to National Insurance as well as Income Tax.
I urge you to start this tax year actively deciding with your team how to manage tips. As Steve Thompson, MD of TEAM Accountancy Solutions and another of my programme’s advisors, warns, once that decision is made it’s critical to record tips accurately. HMRC knows tipping is common across the service sector and is perfectly capable of making its own estimates for additional tax demands.
For HMRC’s overview on tips and tax, click here. Detailed guidance can be downloaded from here.