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Oct 1, 2024 · From today, if an employer breaks the law and retains tips, a worker will be able to bring a claim to an employment tribunal. Most employers already pass on tips to the staff who earn them;...
Oct 1, 2024 · Policies and records. The Employment (Allocation of Tips) Act 2023 applies to tips, service charges and gratuities that employers have 'control or significant influence' over. The act is known as the Tipping Act 2023. By law, employers must: pass on these tips to employees without deductions, other than usual tax and National Insurance deductions.
From 1 October 2024, employers must pass on all tips to their workers. This is because of a new law known as the ‘Tipping Act’. Tips include money given to employees by customers, as well as service charges that are added to the bill. If customers often give tips in your workplace, your employer must have a written tips policy.
- 1. Introduction
- 2. Overview
- 3. Definitions
- 4. VAT
- 5. Income Tax
- 6. Income Tax and troncs
- 7. National Insurance contributions
- 8. National Insurance contributions and troncs
- 9. Tips paid electronically
This guide is for employers and those responsible for arrangements to share tips, gratuities and service charges amongst employees in the catering and service industries. It covers the treatment of tips, gratuities and service charges for Income Tax, National Insurance contributions, National Minimum Wage and VAT purposes, including the treatment where a tronc exists.
This guide is not exhaustive and does not cover every situation. If you are in any doubt, you can get advice from HMRC (see section 13).
A customer may make different types of payment on top of the basic charge, but usually it will be one of the following:
•mandatory service charge
•discretionary service charge
•gratuity paid to the employer as part of a cheque, credit or debit card payment
•gratuity paid into a staff box or similar
•gratuity handed or paid directly to an employee
Tip or gratuity
A tip or gratuity is an uncalled for and spontaneous payment offered by a customer. This can be in cash, as part of a cheque payment, as a specific gratuity on a credit or debit card payment or paid using a digital payment service or application.
Service charge
A service charge is an amount added to the customer’s bill before it is presented to the customer. If it is made clear to the customer that the charge is a purely discretionary amount and there is no obligation to pay, the payment is a voluntary service charge. Where this is not the case, the payment is a mandatory service charge. If you impose a mandatory service charge and the money is paid out to your employees, National Insurance contributions are always due on the payments no matter what the arrangements are for sharing out the money. HMRC will accept that a payment is a voluntary service charge if it is clearly presented to the customer as an entirely optional payment. The literature seen by the customer should reflect this and be consistent with advice given to customers by employees. Any amount entered on an ‘open’ credit or debit card slip by a customer is likely to be a gratuity.
Tronc
A tronc is a special pay arrangement used to distribute tips, gratuities and service charges.
Tips are outside the scope of VAT when genuinely freely given. This is regardless of whether:
•the customer requires the amount to be included on the bill
•payment is made by cheque or credit or debit card
•the amount is passed to employees
Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore standard rated.
If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not a consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.
If customers give or pay tips directly to employees or leave them on the table and individual employees keep them without any involvement from the employer, then PAYE does not apply. Tax will be due on these amounts, but no National Insurance contributions will be due.
It is the responsibility of the individual employee to advise HMRC of the amounts received by either including how much they received in tips in their Self Assessment tax return or reporting the amount of the tips received to HMRC. The tax will usually be recovered by an adjustment to the employee’s PAYE tax code.
If your employee does not fill out a tax return then they must report the amount of tips they have received. They can do this either online using the personal tax account or by calling HMRC’s Income Tax enquiries helpline.
HMRC will give the employer an adjusted tax code so they can collect any additional tax through PAYE. This is where tax is taken from the employee’s wages before they get them.
Employees can contact HMRC using their personal tax account or by calling HMRC’s Income Tax enquiries helpline if they think their tax code is wrong or to report the tips they have received.
PAYE must be operated on all tips paid by an employer to an employee. Responsibility for operating PAYE rests with the employer even if the employer delegates the task to an employee if there is a tronc operating. You can find more advice at section 6.
A tronc is run by someone usually known as a troncmaster. Where the troncmaster is in control of the tips and responsible for sharing them amongst employees, the employer must tell us unless the arrangement came into existence before 6 April 2004. This is so we can identify the person responsible for PAYE in each period.
We may check an arrangement exists to share tips amongst employees and that the troncmaster accepts that role. A PAYE scheme will be set up for the tips in the troncmaster’s name unless different PAYE arrangements need to be made.
The troncmaster is personally responsible for all aspects of operating a PAYE scheme. They may be held responsible for any failure to deduct tax from payments from the tronc. Troncmasters who need help in understanding their PAYE responsibilities should contact us for advice.
A troncmaster with a PAYE scheme may use the employer’s payroll to operate PAYE on their behalf (the employer effectively acting as a payroll agent), but the troncmaster’s PAYE records must be kept separate from the employer’s. The tronc PAYE scheme must be entirely independent of the employer’s scheme and must be run as such.
Legislation 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
•it is not allocated, directly or indirectly, to the employee by the employer
By ‘allocated’ we mean deciding who should receive what amount by way of tips. Whether either of the conditions apply will depend on the facts.
In most cases where you pass tips to an employee, you are liable for both employer and employee National Insurance contributions because neither of the 2 conditions are satisfied.
If someone other than you is responsible for allocating the tips, see section 8 for more guidance. You should contact HMRC for advice if you are responsible for allocating tips, you pass tips to your employees or if you consider that you are not allocating the tips.
Where payments made from a tronc attract National Insurance contributions liability, the troncmaster is not required to pay National Insurance contributions on those payments. Responsibility for calculating any National Insurance contributions due and making payment to HMRC rests with the employer.
Payments of tips do not attract National Insurance contributions if the:
•troncmaster is allocating money that originally was not paid to the employer and the employer does not pay the money directly or indirectly to their employees
•employer does not determine, directly or indirectly, the allocation of those tips
Customers can also pay tips in an electronic format, such as through a digital application designed for the purpose, rather than making a payment direct to either an employer or an employee by card or in cash. This does not change any of the basic principles that apply as set out in this guide for deciding how tax is to be accounted for on those ti...
Jun 30, 2020 · Bar staff and workers in fast food outlets are the least likely to receive tips, with 56% and 69% of Britons respectively saying they never tip when using these services. However, three in ten Brits (31%) say they do on occasion tip when getting a round in at the pub.
- Data Journalist
Tipping is always optional, it is not expected or required. You should however be aware that this means that staff will spend as much time with you as they need to fulfill their job and no more as they have other customers to attend to as well.
People also ask
Do you have a tips policy?
Does the 'tipping Act' apply to England?
Does the tipping Act apply if an employer collects cash tips?
Should employers be liable for tipping?
Does the tipping Act cover gifts?
When should I get my tips?
What is the Employment (Allocation of Tips) Act (“The Act”)? Does The Act apply to card or cash tips or both? When will The Act come into effect? Who will qualify to get a share of tips? What does ‘fairly allocated’ mean? How long do I have until tips must be paid into workers’ bank accounts?
