Tips and Gratuities Tax 2026/27

The tax treatment of tips depends on how the money reaches you and who controls its allocation. All tips, gratuities and service charges are taxable earnings. Tips passed to employees by an employer normally go through PAYE; cash tips kept directly by an employee are not subject to PAYE or Class 1 NIC at source, but the employee still has to tell HMRC so the Income Tax can be collected. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 and its statutory code have required qualifying tips received by employers to be allocated fairly and transparently, with records kept for three years. See how tips change your take-home pay with the Salary Calculator→.

This guide covers the 2024 allocation rules, card versus cash tips, tronc schemes, service charges, and the record keeping that keeps you out of trouble.

Card Tips — Taxed Through Payroll

When a customer adds a tip to a card payment and the employer receives it, the employer normally operates PAYE and Class 1 National Insurance when the tip is passed to employees. The exact National Insurance result depends on whether the employer or an independent troncmaster controls the allocation. Income Tax still applies to the employee's tip income. Do not estimate take-home pay by applying one fixed percentage: the employee's tax code, pay period, existing earnings and the allocation structure all matter. In 2026/27 the standard employee Class 1 rate is 8% between the main thresholds and 2% above the upper earnings limit, while employer rates and categories are separate.

Cash Tips — Self-Declared

Cash handed directly to you by customers, or left on the table and retained by you without employer involvement, is not normally subject to PAYE or Class 1 NIC at source. It is still taxable income. Tell HMRC so it can amend your tax code, and use Self Assessment where HMRC requires a return. Keep a contemporaneous log of every cash tip with dates and amounts; the correct tax depends on your total income and circumstances, not on a fixed example rate.

Tronc Schemes — The NIC Advantage

A tronc is an organised arrangement for sharing tips, usually run by a troncmaster who is not the employer. Income Tax still applies. National Insurance is not automatically avoided merely because an arrangement is called a tronc: it depends on who received the money and who decides how it is allocated. Broadly, an independent troncmaster may allocate qualifying tips without Class 1 NIC where the employer is not directly or indirectly involved in the allocation; employer-controlled allocations can attract Class 1 NIC. There is no universal “registered tronc” rate or guaranteed saving, so employees should ask who controls the allocation and how the payroll is operated.

The 2024 Allocation Rules

The Employment (Allocation of Tips) Act 2023, in force from 1 October 2024, requires employers to pass qualifying tips, gratuities and service charges to workers without deductions except in limited lawful cases, and to allocate them fairly and transparently. Employers must have a written tipping policy, consult where required and keep tipping records for three years. Workers can request relevant records and challenge failures in an employment tribunal. Whether a particular mandatory service charge falls within the statutory definition must be assessed against the legislation and guidance; do not assume that every amount on a bill is allocated in the same way.

Employer Duties and Penalties

The Act's duties carry real consequences. Employers must publish a written tipping policy, allocate qualifying tips fairly, and keep allocation records for three years. A worker can request their own relevant records, subject to the statutory limits, and challenge failures through an employment tribunal. The tax and National Insurance treatment is separate from the allocation duty: payroll or tronc liability depends on who receives and controls the money, so the employer should follow HMRC's PAYE and NIC guidance rather than assume that a tronc removes every NIC liability.

Service Charges and Benchmarks

Discretionary service charges are generally treated like tips for tax when they are passed to employees. A compulsory service charge is not a voluntary tip; if the employer passes it to employees, it is treated as earnings and the payroll/NIC rules apply. HMRC does not make a universal employee tax calculation from hospitality “benchmark” figures in this guide. Keep the bill, allocation, rota and payment records that explain what you actually received.

Tips and Universal Credit

If you claim Universal Credit, tips are earned income and must be reported in your monthly assessment — whether they arrive through payroll or as cash. Card tips processed through payroll are captured automatically via RTI and reduce UC by 55p per £1 of net earnings above the work allowance; cash tips you declare have the same effect, and failing to declare them risks an overpayment that is recovered from future awards. The assessment period is the month the tip is paid, not earned, so a December holiday-tip spike can cut a January UC payment sharply. Tronc payments are treated the same as other earnings for UC purposes — the NI exemption is a payroll matter, not a UC one. Hospitality workers on UC should keep a tip diary that matches the monthly assessment periods, so the figures they report to the DWP reconcile with the payslips and the cash in their pocket.

Frequently Asked Questions

Evidence and decision checks

A reliable tips gratuities tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Evidence and decision checks

A reliable tips gratuities tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Evidence and decision checks

A reliable tips gratuities tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Check how tips and salary combine with the Salary Calculator→, and read the Self Assessment Filing Guide if you need to declare cash tips.

Official sources

• GOV.UK — Tips at work: tips and tax
• HMRC — E24: tips, gratuities, service charges and troncs
• HMRC — PAYE manual: tips, gratuities, service charges and troncs
• GOV.UK — Code of Practice on fair and transparent distribution of tips
• GOV.UK — National Insurance rates 2026/27