A correctly set up and run tronc can save on NI

Tips, no matter how they received, are taxable income and always subject to income tax. This could be deducted at source or collected through self-assessment of the recipient.

If tips and gratuities are retained by the employer, they are subject to Corporation tax, although there is likely to be new legislation to stop this practice, possibly by April 2020. There may also be VAT if they are include as income of the company.

cost savings

When tips are paid out by the employer as part of wages, they are subject to PAYE and NI, plus they are pensionable.

In our experience, employers are often attempting to manage tips in a fair way but because of the complexity surrounding tax and NI, the result is often less money for both the employee and a cost associated for the employer.

Common Scenarios

 

Typically there are four ways organisations deal with tips:

 

  1. They keep everything, passing no benefit to employees

  2. They pass on the majority of tips (say 90%) but retain a percentage to cover admin costs such as credit card fees

  3. Employer increases payroll so no benefit

  4. A tronc scheme is in place

  Scenario 1 Scenario 2 Scenario 3 Scenario 4
  Employer keeps 100% Employer keeps 10% Employer increases payroll Effective tronc scheme
Amount of tip £100 £100 £100 £100
Employer benefit £67.50 (£16.92) £0.00 £0.00
Employee benefit £0.00 £59.04 £47.21 £80.00
Amount paid to treasury £32.50 £57.88 £52.79 £20.00
tron cost savings

The above calculations assume that an employee is subject to NI and PAYE at basic rate and is also a member of an auto enrolment pension scheme.

This example shows the difference it makes to both the employee and employer if an effective tronc scheme is place.

There is even more complexity around this subject that could affect your tax liability, which is why we always carry out a review of your current situation before making recommendations on the most tax efficient way of setting up your tronc scheme.

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