Tips, gratuities and service charges are an important part of remuneration for many workers in the hospitality and service sectors. However, the rules governing how these amounts are collected, allocated and taxed can be complex, particularly where a tronc arrangement is used.

Since 1 October 2024, employers have had to comply with legislation designed to make sure that qualifying tips are distributed fairly and transparently among workers. This did not change the existing income tax and national insurance contribution treatment, meaning employers need to consider both the employment law and employment tax position.

What is a tronc?

A tronc (from the French phrase tronc des pauvres, meaning ‘poor box’) is an arrangement used to pool and distribute tips, gratuities and service charges among workers. It is normally administered by a troncmaster, who decides how the money should be allocated, rather than the employer.

A tronc distribution is not automatically exempt from national insurance contributions, but if it is distributed by an independent person then no national insurance will be due. Tax is always due on tronc payments, but the party that withholds the tax from the payment depends on who allocates the tips.

Who should withhold tax?

Tips are taxable income, but the responsibility for operating tax/PAYE depends on how they are received and distributed.

Workers who receive tips directly are responsible for declaring the tips to HMRC and paying the relevant tax.

Employers who receive tips and pay them directly to workers, or are responsible for allocating them, must operate PAYE.

Where a tronc is independently administered by a troncmaster, a separate PAYE scheme will normally be needed. The troncmaster is personally responsible for operating PAYE correctly, although the employer may provide payroll software or administrative support as an agent. The tronc records and PAYE scheme must remain separate from the employer’s own payroll records.

In recent years, we have seen the emergence of third-party troncmaster providers and new methods of collecting, reviewing and distributing tips. These are meant to help with distribution but can cause complexities when determining the tax and national insurance position. This is partly the reason for the new Act and Codes of Practice.

When are national insurance contributions due?

Broadly, tips may be exempt from Class 1 national insurance contributions where they are not allocated directly or indirectly by the employer. Therefore, payments made through an independent tronc may be outside the scope of national insurance contributions if the troncmaster independently decides how the funds are divided.

However, where the employer decides who receives the tips or how much each worker should receive, employee and employer national insurance contributions will generally be due. National insurance contributions are also always due where mandatory service charges are passed to workers, regardless of how those payments are shared.

Employers should not assume that appointing a troncmaster or processing payments through a separate payroll is enough to make them exempt from national insurance contributions. The underlying decision-making process and the employer’s actual level of influence are critical.

Are your tipping arrangements fair and transparent?

The Employment (Allocation of Tips) Act 2023 requires employers to pass qualifying tips and service charges to workers without deductions, except for limited permitted deductions such as income tax. Where the employer controls or significantly influences the distribution, tips must be allocated fairly and transparently.

Employers that receive qualifying tips on more than an occasional and exceptional basis must maintain a written tipping policy explaining how tips are accepted, allocated and distributed. They must also keep tipping records for three years. Qualifying tips must be distributed no later than the end of the month after the month in which they were paid by the customer.

Equal allocation is not necessarily required. Employers may use objective factors such as hours worked, role, level of responsibility, length of service or customer intention. However, the methodology must be fair, reasonable, clearly communicated and applied consistently.

What should employers check in their tronc arrangements?

Employers should review their tronc and tipping arrangements to confirm that:

• The written policy accurately reflects how tips are handled in practice
• Responsibilities between the employer and troncmaster are clearly documented
• The troncmaster has genuine independence over allocation decisions
• The correct entity operates PAYE
• National insurance contributions are applied where required
• Mandatory and discretionary service charges are identified correctly
• Tips are distributed within the required timeframe
• Clear records support the receipt, allocation and payment of tips.

More recent employment law changes also require that workers are provided with written particulars and consulted on the fairness of the distribution of tips.

It is particularly important that employers carry out a periodic review after changing their payroll provider, appointing a new troncmaster, introducing card or app-based tipping, changing their allocation methodology or expanding to new locations.

Key considerations for employers

A properly structured tronc can provide an effective and transparent way to distribute tips and may allow qualifying payments to be made without employee or employer national insurance contributions. However, the tax treatment all depends on the arrangement.

Employers should align their tipping policy, payroll treatment, decision-making process and actual working practices. Taking action now can help identify historic errors, make sure the arrangements achieve predictable national insurance contributions and reduce the risk of challenge from HMRC or workers.

If you need help reviewing your tipping or tronc arrangements, please get in touch with Chris Robson, Joe Plater or your usual RSM contact.

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