The Allocation of Tips Act 2023 comes into force on 1st October 2024 which will crack down on employers evading taxes on tips. Here's what you need to know

What taxes are due?

Tax on tips can be complex.

Income tax: Tips  are subject to income tax, just like regular wages.

If given to the employee in the form of cash or paid directly to the employee, they will need to report their tips as part of their taxable income when filing their annual tax return.

If the tips  are received by the employer e.g via employers card machine and then paid to the employee, the employer is responsible for deducting PAYE from the amount paid.

National insurance: National insurance contributions depend on whether the tips were paid directly to the employee, in which case NICs would NOT apply. If tips are received by the employer then they are responsible for withholding income NICs on tips paid through the payroll system.

It is vital for both employees and employers to maintain accurate records of tips received and distributed. The tax authorities may require these records to verify tax compliance.

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Tipping with Cash

As people carry less cash, staff have been receiving less tips and therefore earning less.

With recruitment and retention a big challenge in the hair and beauty industry, this gives salon owners a headache.

How do I increase staff tips and boost their earnings?

Staff historically preferred cash as any tips given directly to staff do not attract National Insurance so they save up to 12%.

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Tipping tax evasion

To get round this some business owners and staff will add a tip to the client bill and process this via the business card machine. E.g £100 + £10 tip

They then record a "cash back" or "refund" to balance the books so cash up and revenue reports align. I.e reports show £10 going out

The £10 tip is then taken by the stylist as cash and is typically not declared for income tax or national insurance purposes.

This is tax evasion.

Tax evasion carries serious penalties – those found guilty of tax evasion could face fines and prison sentences – from £5,000 and six months in jail to seven years in prison and unlimited fines.

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Who is liable?

Employers are responsible for ensuring National Insurance is paid make the appropriate deductions from employees. You must also provide a payslip showing tax and NIC deductions.

Employees are responsible for paying the correct National Insurance and income tax when paid directly.

The Allocation of Tips Act 2023 was introduced to clamp down on tipping tax evasion and applies to all UK businesses.

HMRC are increasingly cracking down on wider tax evasion. They publish a regular list of individuals / businesses prosecuted here

• Nails @555 Limited (Formerly known as Nails @5 Limited) was charged a penalty of £116,981.13
• Time To Be Me Ltd was charged a penalty of £85,926.48
• Themeroo Limited was charged a penalty of £20,535.24
• Sami Mustafa Palu (Trading as Smart Chaps Male Grooming) was charged a penalty of £15,307.56

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How can Slick help?

Slick's integrated tipping gives you the best of ALL worlds

• Clients are prompted to leave a tip which increases tips earned by 25%
• These tips are paid directly to staff which means it does not attract National Insurance so you save money
• Tips do not go via your bank account so there is no risk of a dispute with HMRC
• No tipping admin: tips bypass you and go direct to staff- both employees and chair renters alike
• You are compliant with The Allocation of Tips Act 2023

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The information contained in this website is provided for informational purposes only, and should not be construed as legal advice on any matter. Please consult your solicitor or laywer for advice on your individual circumstances and business