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Tipping: Tax Rules and Your Rights

Tips are taxable income. All of them, cash and card. This guide explains how it works so you can stay on the right side of HMRC.

Quick rule of thumb: Every tip you receive is taxable income. Cash or card, it goes on your Self Assessment. HMRC can see your card takings and will notice if the numbers don't add up.

The Employment (Allocation of Tips) Act 2023

This Act came fully into force on 1 October 2024. It changed the rules on how employers handle tips, but it only applies if you are an employee or worker under the Employment Rights Act definition.

Here is what the Act requires:

• Employers must pass on 100% of tips to workers with no deductions, except for tax.
• Employers must have a written tips policy and keep records for at least 3 years.
• Workers have the right to request tip records and bring a tribunal claim if tips are withheld.

But if you are genuinely self-employed - a chair renter, booth renter or sole trader - the Act does not directly apply to you. Your tips are your business income, not employment income.

If you work as a chair renter and card tips go through the salon's machine, how those tips are split between you and the salon should be written into your chair rental agreement. Do not leave this to a verbal understanding.

Tax Treatment for Self-Employed Beauty Workers

All tips are taxable income, whether cash or card. You include them in your business income on your Self Assessment tax return (SA103 supplementary pages).

• Cash tips: Add them to your takings and declare them as self-employed income. There is no exemption for small amounts.
• Card and digital tips: Same treatment, whether they come through your own card reader or are passed on from the salon.
• VAT: Voluntary tips from clients are outside the scope of VAT and do not count towards your VAT turnover threshold (April 2025: £90,000). Compulsory service charges may count, but most beauty businesses do not charge compulsory service charges.

National Insurance on Tips

For self-employed workers, tips form part of your trading profits. National Insurance is calculated on those profits in the normal way.

• Class 2 NI: £3.50 per week (2025-26 rate). Only payable if profits exceed the Small Profits Threshold of £6,725.
• Class 4 NI: 6% on profits between £12,570 and £50,270, then 2% above that (2024-25 rates).

There is no separate NI charge just because money is labelled "tips." Tips are profit. Profit is taxed and NI'd the same as everything else.

Card Tips Through the Salon's Machine

When a client tips on card at the salon's till, the money goes to the salon first. What happens next depends on your status.

• If you are an employee or worker: The Tips Act 2023 requires the salon to pass on 100% of your share. They cannot deduct admin fees or card processing charges from tips.
• If you are a self-employed chair renter: How card tips are split depends on your contract, not the Tips Act. Some salons keep a percentage for card processing costs. Others pass everything through. Get this agreed in writing before you start.

Whatever you receive is your taxable income. Record it.

What Records to Keep

HMRC expects you to keep reasonable records. You do not need a complicated system. You need:

• Daily or weekly totals of cash tips received.
• Reports from your card processor showing card tips separately.
• Any tip split statements from the salon, where they collect card tips then allocate shares.
• A note in your income log is enough. A spreadsheet column works fine.

Keep all records for at least 5 years after the 31 January submission deadline for that tax year.

What Happens If You Don't Declare Tips

HMRC treats undeclared tips as under-declared trading income. The consequences are real.

• Penalties for careless inaccuracies range from 0% to 30% of the unpaid tax. Deliberate under-reporting can mean penalties up to 100%.
• Interest is charged on late payments from the date the tax was originally due.
• HMRC can cross-reference card processor data with your declared income. If your card takings suggest you should be busier than your declared income shows, they will ask questions.
• Cash-heavy beauty businesses are under increased scrutiny. Operation Machinize (March to April 2025) targeted 380 cash-intensive premises including barbershops and nail bars across the UK.

Do not assume cash tips are invisible. HMRC's data matching is better than most people think.

Tipping Culture in UK Beauty (2025-26)

Tipping is common in UK beauty but not guaranteed.

• Payment provider data aggregated by NHBF suggests UK salon tips average around 15-20% of the bill (2024 data).
• Salons using digital tip prompts on card readers collect around 47% more in tips than cash-only businesses (2024 payment processor surveys).
• If you use a card reader with a built-in tip prompt, expect more tips. It removes the awkwardness of asking.

Tip for new starters: Set up a "tips" column in your income tracker from day one. It takes 5 seconds per client and saves you hours of guesswork in January. Every tip counts as income, even the £2 ones.

Who to Contact

• HMRC Self Assessment helpline: 0300 200 3310 (Free)
• HMRC Payment helpline: 0300 200 3835 (Free)
• ACAS: 0300 123 1100 (Free, for tips and employment rights questions)
• Citizens Advice: 0800 144 8848 (Free)

Sources

• Employment (Allocation of Tips) Act 2023
• HMRC E24 guidance on tips, gratuities, service charges and troncs
• gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs
• NHBF tipping data
• National Crime Agency, Operation Machinize (March to April 2025)

Related Guides

• Self-Assessment for Hairdressers
• Self-Assessment for Beauty Therapists
• Setting Up Your Business Record-Keeping
• Chair Rental: Complete Guide
• Chair Rental Agreements
• Payment Processing Compared

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