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Introduction

Tips and commission are both varieties of payment that employees may receive in addition to their regular wage or salary payments. Tips, in particular, are often paid by a customer or client rather than by the employer. This note also covers the position regarding the distribution to employees of service charges applied directly to customers’ bills.

The starting point is that both tips and commission, however paid, are taxable as earnings in the hands of the employee. In the case of tips, there are a number of ways in which they can be paid and a number of routes they can take before ending up in the hands of the employee. It is the handling of the payments before they reach the employee that determines whether the payments are also subject to NIC, whether they are subject to PAYE and, if so, who should operate PAYE in respect of the payments.

Tips and commission paid in vouchers rather than cash are still taxable as earnings.