If you’re an employer in the hospitality, leisure or service industry, you have probably heard about the new rules introduced last year for the distribution of tips, gratuities and service charges.
The Employment (Allocation of Tips) Act 2023 aims to ensure that people who work in the hospitality, leisure and services industries get to take home more money.
But some employers don’t realise that a system commonly used for tips can ensure they won’t have to pay National Insurance (NI) on these earnings – resulting in savings for both them and their employees.
The new rules: Employment (Allocation of Tips) Act 2023
The Employment (Allocation of Tips) Act 2023, introduced on 1 October, 2024, states that all tips, gratuities and service charges must be paid to employees without any deductions from their employers.
It is expected to help around two million workers benefit from an estimated £200 million on their earnings.
The key provisions of the new act are:
Full allocation to workers: Employers are required to distribute 100% of tips and service charges to staff, including agency workers. No deductions can be made for administrative costs or other expenses.
Wage supplementation: Employers cannot use tips to top up their workers’ wages to meet minimum wage requirements.
Transparent policies: Businesses must establish clear, written policies outlining how tips are distributed. These policies should be accessible to all employees and displayed where both staff and customers can see them.
Timely distribution: Tips must be paid to employees by the end of the month following their receipt. This covers both cash and card payments.
Record keeping: Employers are obliged to keep detailed records of all tips received and their allocation for at least three years. Employees have the right to request access to their personal tipping records.
Legal recourse: Workers can bring claims to employment tribunals if they believe tips have been unfairly withheld or misallocated. Employers found in violation may be required to compensate affected employees.
Using the tronc system to optimise tax efficiencies
Under the new rules, a properly implemented and compliant tronc system can be used to ensure employers and employees do not pay NI on their tips.
The tronc system is a common fund into which tips and service charges are paid before being managed and distributed to staff.
The key aspect of the tronc system is that the payment of tips does not attract NI if the employer does not have any say in the collection and allocation of the tips.
The tronc must therefore be operated independently of the employer without any interference from them, directly or indirectly, about how tips are allocated among their staff.
This means that an employee can be installed as the ‘troncmaster’ and be responsible for deciding on the allocation and distribution of tips to staff.
Alternatively, the employer can outsource the tip collection to an independent third party to run the tronc system and act as the troncmaster.
To meet the conditions for NI exemption, the troncmaster, in consultation with employees, should set transparent criteria for tip distribution without employer involvement.
Accurate and detailed records of all tips received and distributed must also be maintained, and the tronc must also be registered with HMRC. This is to demonstrate compliance with both the new act and HMRC guidelines.
The tips will still be subject to PAYE under a tronc system, but not NI. This means more money for employees than if the tips were distributed by employers.
Find out more about the tronc system and tips
If you would like to discuss any aspect of the Employment (Allocation of Tips) Act 2023 and how it applies to your business, please contact Tom Rhodes by emailing Tom.Rhodes@lithgow-perkins.co.uk