Tips, Gratuities and Tronc Schemes

Introduction

If your business receives tips, gratuities or service charges, you need to understand when tax and National Insurance are due and what your responsibilities are as an employer. How these payments are taxed depends on who receives them, how they're distributed, and whether you operate a tronc scheme. Getting this right means your employees receive their entitlements correctly and you stay compliant with HMRC rules.

When are tips and gratuities taxable?

All tips, gratuities and service charges count as taxable income for your employees, regardless of how they receive them. This means Income Tax is always due on these payments.

However, National Insurance contributions (NICs) are handled differently depending on how the tips are paid and who controls their distribution. This distinction is important because it affects both your costs as an employer and how you process payroll.

Tips paid directly by customers to staff

When customers give cash tips directly to your employees, these are still taxable. Your employees are responsible for telling HMRC about this income, but you have no direct payroll obligations as the employer because the money never passes through your hands.

Service charges and tips paid through you

If tips or service charges are added to customer bills and you receive the money (for example, card payments with service charges added), the tax and National Insurance treatment depends on how you distribute them:

If you decide how to allocate the tips between staff, you must deduct PAYE tax and pay both employer and employee National Insurance contributions. These payments are treated as additional wages.

If you pass the tips to a troncmaster who decides the allocation, only PAYE tax is due through the tronc scheme. No National Insurance contributions are payable by you or your employees on these amounts.

What is a tronc scheme?

A tronc is a separate organised arrangement used to distribute tips, gratuities and service charges to employees. The person who runs the tronc is called a troncmaster.

A tronc scheme creates a clear separation between your normal payroll and tip distribution. The key advantage is that when tips are distributed through a properly run tronc where you don't control the allocation, no National Insurance contributions are due – saving both you and your employees money.

How tronc schemes work

When you operate a tronc scheme, the troncmaster is responsible for:

• Deciding how tips are distributed among employees (if you don't make this decision)
• Running a separate payroll for tronc payments
• Deducting PAYE tax from tronc payments
• Reporting the payments to HMRC

You must inform HMRC who the troncmaster is so they can set up a separate PAYE scheme specifically for the tronc. This is distinct from your main business PAYE scheme.

Who pays what: Tax and National Insurance

The table below shows who is responsible for tax and National Insurance depending on who controls the distribution:

You decide how the tronc money is divided: You pay PAYE tax and National Insurance contributions (both employer and employee)

The troncmaster decides how the money is divided: Troncmaster pays PAYE tax – no NICs are due

Someone else (not acting for you) decides how payments are distributed: Troncmaster pays PAYE tax – no NICs are due

Your responsibilities when NICs are due

If you control how tips are allocated and therefore owe National Insurance contributions, you need to:

• Find out from the troncmaster what amounts are being paid to each employee and when
• Add these tronc payments to your employee's other pay when calculating National Insurance
• Pay the employer and employee National Insurance contributions through your normal payroll

This coordination between you and the troncmaster is essential to ensure the correct deductions are made.

National Minimum Wage considerations

Tips and gratuities have specific rules regarding National Minimum Wage calculations. You cannot count tips towards paying the National Minimum Wage, so you must ensure your employees receive at least the minimum wage before any tips are added.

VAT treatment

Service charges may also have VAT implications for your business. Whether VAT applies depends on whether the service charge is voluntary or compulsory and how it's treated in your business.

Setting up a tronc scheme

If you're considering setting up a tronc scheme:

1. Appoint a troncmaster (this can be an employee but should be someone independent of management decisions)

2. Notify HMRC of the troncmaster's details so they can establish a separate PAYE scheme

3. Ensure the troncmaster has clear authority to decide how tips are distributed without your direction

4. Set up systems for the troncmaster to run payroll and report to HMRC

The independence of the troncmaster's decision-making is crucial. If you retain control over distribution, you'll lose the National Insurance advantages and will need to pay NICs as the employer.

Record keeping

Both you and the troncmaster must maintain proper records of all tip and service charge payments. The troncmaster needs these records to operate their payroll correctly, and you need them to ensure accurate reporting to HMRC and to verify National Minimum Wage compliance.

Sources

• When National Insurance and PAYE is due on tips, gratuities and service charges (E24)
• Employee gets tips, gratuities or service charges through a tronc

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.