Payroll Tax – Tips and Service Charges
Tipping is widely seen as an important supplement to hospitality workers’ incomes. However, without proper consideration, it can expose businesses to potential risks and without implementing systems, employees receiving tips can quickly become an administrative burden.
Firstly, if you are not sure whether you should be running a Tip and/or Service Charge scheme then check out our blog here. Also, if you want to know the distinction between a Tip and a Service Charge scheme for VAT purposes, have a quick read of our previous blog here.
How tips are taxed depends on a few factors. Different treatments apply if:
- An individual member of staff keeps their tips themself or receives tips through informal pooling, to when
- Formal pooling occurs, and there is:
A single establishment may well experience all three situations simultaneously. We’ll run through each of these below.
Tips given directly to an individual or not formally pooled
Paying income tax on this income is the individual’s responsibility. Any income from this source should be declared online using a personal tax account, which will adjust the employee’s Tax Code. Employees should take care to declare this income as tax codes can easily be checked if HMRC performs any checks on PAYE compliance.
The above also applies to informal pooling arrangements for cash tips, which are when the following criteria are met:
- Monies are distributed at the end of a shift or a day and are not accumulated over a longer period of time
- Cash tips are not amalgamated with any tips paid by card or any service charge proceeds
- These tips are not dealt with by anyone who acts as a formal Troncmaster
- And finally, they are not managed, policed or controlled by the business.
Tips that are formally pooled and shared
How should these be administered?
This form of tips must be taxed at source (before distribution to staff). This is ultimately the employer’s responsibility. Tax can be collected through the employer’s Payroll scheme, or by a separate Tronc scheme run by a Troncmaster (more on Tronc schemes below).
Record keeping is an important part of both methods of distributing tips. Staff require transparency over how tips are shared and can have the right to request inspection of tipping records, HMRC also conducts reviews of tipping records.
With any form of input from the employer
Through the employer’s PAYE Scheme
Tips and discretionary services charges must be distributed via the employer’s PAYE scheme when the employer has input on how tips are shared. If the employer has a say in the distribution, it is responsible for ensuring deductions are made through their payroll scheme. All mandatory service charges will be distributed via the employer’s PAYE scheme.
The main downside of this is that Tax and NI are suffered in the same way as on normal earnings, which is why where possible, most establishments also use a mix of informal pooling and a Tronc Scheme.
It’s also important to note that funds distributed in this method do not contribute to the National Minimum Wage, but they do count as qualifying earnings for Auto-enrollment purposes.
With no input from the employer
Tronc Scheme
Tips and discretionary services charges can be distributed via a TRONC scheme when the employer has no input on how tips are shared.
Put simply, a Tronc Scheme or tronc system is a name given to an organised arrangement existing within a hospitality business to pool and share proceeds of gratuities paid by customers. Operated correctly it can deliver significant financial savings for both a business and its employees due to the favourable taxation treatment with regards to National Insurance contributions.
Where a tronc exists, it is typically used to distribute card tips and discretionary service charges and is managed by a Troncmaster. The Troncmaster can’t be anyone with ‘hire-and-fire’ power, or someone responsible for setting rates of pay. The business can decide who carries out the role, who is typically a member of staff, or an external Troncmaster, the latter are often favoured due to their impartiality and expertise.
A key point for employers to remember is that, if required, the employer must make HMRC aware of the existence of a Tronc scheme, and the identity of the Troncmaster. Failure to do so would make the employer responsible for the tax due should it not be collected and paid.
The Tronc scheme can run as a separate PAYE scheme or it can be acceptable for the employer’s payroll to be used to operate PAYE for the Tronc, provided that the allocation instructions come from the Troncmaster. No separate payroll or registration of the tronc system with HMRC is required when the business retains all funds and pays staff directly. Where the employer holds the Tronc funds, it must be identified separately and not available for the business’s use.
Tronc schemes and their administration can become complex but are often favoured when significant National Insurance savings are to be made.
As always, we suggest you seek professional advice if necessary and more in-depth reading materials are suggested here:
Digital Tipping Solutions
Modern tipping solutions are becoming a popular option within the hospitality sector, led by businesses such as TiPJAR and Grtfl. These solutions can help run Tronc Schemes, set up distinct digital tip jars that separate funds from EPOS payouts, standalone digital tip jars that are powered by QR codes, or even standalone tipping terminals. Such providers also claim to increase the volume of tips left by customers.
This blog has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice.
