Tips, gratuities and service charges and PAYE
In many sectors, it is common for workers to receive money in the form of tips and service charges from customers. If this applies to your employees, you need to be aware of the rules for deducting PAYE (Pay As You Earn) tax and National Insurance contributions (NICs) from payments of this kind. The procedures to be followed differ depending on the following factors:
- whether the money is paid voluntarily by customers or in the form of a compulsory service charge
- whether your employees receive the money direct from customers or whether it is distributed to them, either by you or through a central pool known as a tronc
Compulsory service charges
If an employee receives money from compulsory service charges you add to your customers' bills, then you are responsible for calculating and deducting both PAYE tax and Class 1 NICs.
This is the case regardless of whether you pay the money direct to the employee, or whether it is distributed through a tronc. A tronc is a system for distributing tips, gratuities and service charges. The person in charge of the tronc is known as the troncmaster.
Tips received directly and kept by your employees
If one of your employees receives a tip directly from a customer and is allowed to keep it, then you do not need to do anything for PAYE tax or NICs. There are no NICs due on the money, and the tax due is the employee's responsibility - we'll usually adjust their tax code to collect it.
Tips and voluntary service charges you distribute to employees
In general, if you distribute any money from tips or service charges to your employees then you must calculate and deduct both PAYE tax and NICs.
This applies to money customers give to you, such as a voluntary gratuity added to a credit card payment, as well as to tips that are received directly by your employees but then given to you to distribute.
There is an exception for situations in which someone else, such as a troncmaster, decides independently of you how much money from tips and service charges an employee should receive, and then asks you to pay the amount to the employee. In this instance, you must calculate and deduct PAYE tax but no NICs are due.
If you pass tips and voluntary service charges to a tronc rather than distributing it yourself, or you don't decide what amounts should be paid to which employees, then the rules outlined in the next section apply instead.
Tips and voluntary service charges distributed by a tronc
A tronc is an arrangement for pooling and distributing tips and service charges, and the person who operates the tronc is known as a troncmaster. If your employees use a tronc, you must tell us who the troncmaster is so that we can set up a PAYE scheme for the tronc.
Bear in mind that, as outlined in the first section above, you are responsible for deducting both PAYE tax and NICs on all money that is distributed from compulsory service charges to your employees - even if it is distributed through a tronc.
For tips and voluntary service charges distributed by a tronc, PAYE tax is always due and it is the troncmaster's responsibility to calculate and deduct it.
However, NICs are only due on tronc payments if you have a role in deciding which of your employees gets money from the tronc and how much each employee should get.
Where NICs are due on a tronc payment they are your responsibility, not the troncmaster's. You will need to consult the troncmaster and take the following actions:
- find out the amount being paid and the date of payment
- include the payment in the employee's gross pay when calculating NICs and show the gross pay on the employee's form P11
National Minimum Wage and tipsAn Employment Appeal Tribunal has ruled in HMRC’s favour in the case of Annabel’s Restaurant and Nightclub. The case concerned the payment of tips through a ‘tronc’, which is an arrangement which sometimes operates in the restaurant industry. The ‘tronc’ which operates as a separate independent payroll, run by a ‘troncmaster’ is used by some restaurants as a means of distributing tips or service charges paid by customers. HMRC have argued successfully that where the tips are paid in this way they do not count towards national minimum wage (NMW) entitlement.
However, it should be noted that where tips are paid along with wages through the main employer payroll then the tips and service charges distributed do count towards the NMW.
A spokesperson for the Department for Business said:
‘It is essential that all UK workers receive the pay they are entitled to and that everyone earns at least the National Minimum Wage. Equally, it's important that tipping is fair and we are already examining what options are available to help ensure transparency.’
Annabel's Restaurant may seek permission to appeal the Judgment.
The main rate of the NMW is currently £5.52 per hour increasing to £5.73 from 1 October 2008.
The development rate for employees between 18 and 21 years old is currently £4.60 increasing to £4.77 from 1 October 2008.
16 and 17 year olds must be paid a development rate which is currently £3.40 per hour increasing to £3.53 from 1 October 2008.
Roskear Payroll Services have successfully run Tronc Payrolls to help client’s employees optimise their tax situations and ensure that there are no future HMRC issues.