In the UK each person can earn a certain amount of money before they start paying tax. This is called a Personal Allowance, and as of 2023 this is £12,570.
You only get one Personal Allowance and everything you earn is counted towards it, including anything you earn on top of your employed wages. Tips are also considered income whether they are paid to you directly by customers (in cash or through cash-equivalent products) or by your employer through your payslip or through .
Because tips are collected by your employer and passed to us to distribute to you, the law says we have tax from these tips before we pay them to you. This means we operate a payroll for these tips.
make sure you pay the right tax overall HMRC uses tax codes, for each payroll you are a part of.
your allowance will be assigned to your main payroll. This means most people have a tax code like 1257L. This tax code says you can earn up to £12,570 on this payroll before you start paying tax (what is sometimes called “free pay”).
If you are on a second payroll, like , you’ve already had your Personal Allowance used up by your wages, so they will ask the second payroll to use a BR tax code. This stands for “Basic Rate” and will mean everything you earn on this second payroll is taxed at 20%, the Basic Rate of tax for everything you earn between £12,570 and up to £50,271 (as of 2023).
If you earn less than £12,570 through your main payroll, you might have some Personal Allowance “left over”. If this is the case HMRC will automatically let us assign you a tax code for the payroll like 123T. This tax code means we can pay you up to £1,239 free of tax (and possibly rebate you any tax you’ve overpaid).
You don’t get this free pay all in one go. HMRC require payrolls to factor this out across the year. if your tax code on a payroll in the first month of the tax year is 123L (meaning you can be paid you to £1239 free of tax), you’ll be able to earn 1/12th of that amount before you start paying tax. In the second month of the tax year, you’ll be able to earn 2/12th of that amount in total for the year before you start paying tax. Amounts above this will be taxed, at the Basic Rate of 20%.
If you’re a higher earner and have earned over £50,271, you might have earned over the Basic Rate threshold through your main job. In this case HMRC will assign a D0 tax code to your pay, meaning you pay 40% of your extra earnings in tax through this payroll. If you’ve historically underpaid tax, they might make this a “” tax code meaning you may pay up to 50% tax until you’ve caught up, but you’ll never pay more than this.
With HRMC get this right the time, and the system is very good at quickly picking up changes. Because of this system, by the end of the year, you’ll generally have paid the right amount of tax.
there are occasions when HMRC get it wrong, usually if you have a particularly complex situation. For example, if you have more than one job, have changed jobs often during a tax year, have claimed taxable unemployment benefits, have additional unearned income (like renting property to someone) or if historically one of your employers made a mistake or got something wrong.
But don’t worry. Even if you haven’t paid the right amount, HMRC will notice and correct it. If you’ve paid too much, they’ll send the money to you. If you haven’t paid enough, they’ll tweak one of your tax codes to make sure it is right.
HRMC have dedicated helplines to support you, and if you do feel things are not right, we’re happy to support you to get in touch. The important thing is always to let them know that is a tronc-only payroll, and that your wages come through your payroll.
This is recorded on the HRMC’s files for , but remember tronc is a specialist area that not everyone at HMRC understands. We’re always here to help if you believe there are any issues, and our advisors are some of the leading specialists in tronc and tax.
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