If you work in a pub or restaurant, chances are you’ve probably never given much thought to your tips- you just finish your shift, pocket them, spend them, and go about your day.

That’s because as far as tips go when you’re employed, your boss is usually responsible for working out the tax impact and making sure the right tax is applied.

When you’re self-employed though, things get a little more complicated.

So, if you’re a diver, a hairdresser or any other kind of self-employed person who’ll occasionally see a financial thank-you from your customers, here’s what you need to know – and what you’ll need to do.

Tips when you’re employed

These are are your employer’s responsibility.

Here’s something you may not know, legally your employer doesn’t need to pass on any tips added to a bill for a service charge, or that a customer chooses to add a debit/credit card payment.

Now of course, you wouldn’t stay with an employer who doesn’t pass on the tips your customer wanted to give you, but it’s worth knowing.

Tips count as income and your employer pays you your income, and they need to make sure you pay the right amount of tax or National Insurance on them.

This applies when tips are pooled and are shared out across the whole business.

So, Tips are income, income is paid by an employer, and they’re supposed to make sure you pay the right amount of tax.

Tips when you’re self-employed

This is YOUR responsibility.

Money that comes into your business, or that you take from your business is income.  And all income is taxable.

So, any tips, whether it has been added as a service charge, or you’re handed extra cash upon payment, or given a gift for your hard work, all of these need to be declared and thought about as part of your income.

All tips you receive should be added to your total income for the year and you’ll be taxed on them..

Let’s say you’re an electrician. You make £40k a year in profit. Any tips you take on top of that need to be added to your income, i.e.. A customer gives you £50 for a job well done.

That now means your income for the year is £40,050 and you will have to let the Tax-Man know and pay tax on this.

Cash tips

If a customer hands or leaves you a cash tip, or in a tip jar, then it’s yours. Your employer isn’t involved at all.

But then it gets complicated.

Tips don’t count as income towards the minimum wage, so they’re not a way for your employer to pay you less. But as far as HMRC is concerned, they are employment income.

That means they’re taxable. And it’s you who’s responsible for letting the tax man know.

If that’s a surprise, don’t worry. Most people don’t know they need to declare their tips.

Because your income is taxed under PAYE, you won’t need to submit a self-assessment tax return. But you need to tell HMRC so they can adjust your tax code.

If not, you might be landed with a bill at the end of the tax year.

How to make sure you’re paying the right amount of tax on your tips

As with all things tax, it all starts with record-keeping. And here’s a free tip about record-keeping when it comes to tax.

It’s as simple as one, two, three.

It’s the simplest way to make sure that your tips are always a reward, not an additional tax burden!