A: The Employment (Allocation of Tips) Act 2023 became effective on 1 October 2024 to ensure that all tips, gratuities and service charges paid by customers are allocated to workers without deduction by employers, other than the required statutory deductions where applicable.
A ‘tronc’ arrangement is one in which tips are pooled and then distributed (paid out) by a person other than the employer, known as a ‘Troncmaster’. Special tax rules apply to such arrangements under which a Troncmaster is required to set up a separate TRONC PAYE scheme (SI 2003/2682, reg. 100) to pay out the tips. The relevant HMRC guidance (E24) can be found in Guidance on tips, gratuities, service charges and troncs – GOV.UK. This was updated on 2 December 2024, to confirm that new legislation introduced on 1 October 2024 in respect of the distribution of tips and gratuities to employees does not affect how they should be assessed for tax and National Insurance contributions.
The PAYE (income tax) treatment is determined according to who is responsible for paying out the tips; whereas the NICs position is determined according to who allocates the tips, regardless of who pays them out. This means that even if the employer is liable to operate PAYE for income tax purposes, they might not be liable for operating Class 1 NICs.
Paragraph 5 of SSCR 2001, Sch 3, provides that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’, is exempt from National Insurance contributions if it meets either of the following 2 conditions:
- it is not paid, ‘directly or indirectly’ to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example, by customers; or
- it is not allocated, ‘directly or indirectly’ to the employee by the employer
For ease of reference, I have summarised the tax and national insurance treatment for the payment of tips in all the possible scenarios we can encounter within the hospitality sector:
- If cash/tips are paid directly to an employee by the customer, it will not be reportable via the employer’s payroll. Employee will be subject to tax via self-assessment or via tax code amendment upon informing HMRC of tips received. National Insurance would not be due on this payment.
- If payment is allocated and made by the Troncmaster and processed through TRONC PAYE scheme it will be taxable but not subject to employer or employee national insurance.
- If payment is allocated and made by the employer via their own PAYE scheme it will be subject to both tax and employee and employer national insurance.
For commentary, see the Croner-i Direct Tax Reporter at 495-800.