From 1 December 2022, the Payment of Wages (Amendment) (Tips and Gratuities) Act 2022 introduces new rules as to how employers will have to distribute tips, gratuities and service charges amongst employees. Employers will be required to clearly display their policy on how tips, gratuities and services chargers are distributed.

Where a tip is included on the bill i.e. as a service charge, it is regarded as part of the consideration for the meal and is liable to VAT at the second reduced rate, currently 9%. However, voluntary payments (tips) made by customers and not appearing on the bill remain outside the scope of VAT.

Tips and gratuities are fully taxable and should be included by employees in their tax returns to the extent that the tips are voluntary payments by customers. However, if the tip appears on the bill, then these tips should be taxed through the PAYE system by the employer.