As of July, employers are no longer allowed to withhold tips from staff. While paying tips may lead to National Insurance Contributions (NIC) costs for both employers and employees, these costs can be avoided by using a tronc arrangement to distribute the tips.
The new legislation applies mainly to those operating in the hospitality sector, and covers all tips, gratuities and service charges. It also brings the law into line with modern payment practices as it covers tips left via card payment.
NICs
Tips paid to employees are subject to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.
For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.
Troncs
A tronc is an arrangement used to distribute tips. It is run by a troncmaster.
Provided it is the troncmaster who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It is still possible, however, for the tips to be included on the employer’s payroll.
The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer makes the decision on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.
HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.
For more information, contact us on 01142 664 432 or email info@smh.group.
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