Who is responsible for paying tax on tips? A guide to the UK’s new tips law, troncs, and paying tax on tips

Who is responsible for paying tax on tips?

The Employment (Allocation of Tips) Act 2023, a new law designed to ensure hospitality workers get 100% of tips and service charges, received Royal Assent in May 2023.

Tipping in the hospitality industry has always been an integral part of the service. Customers who appreciate the service that has been provided leave tips for their staff either as cash or as additional monies on a card payment.

In most hospitality establishments, tips are left for waiting staff and although most customers may now pay for meals by credit card, a substantial number of those customers still leave a cash tip. There may be a belief that a cash tip will go to the individual, whereas a tip on a card may get ‘swallowed’ by the business.

But whichever way the tip is made, who is responsible for paying the tax and/or declaring it to HMRC?

The employee is responsible for paying tax on tips…

If a cash payment is left and the waiter pockets that tips without pooling the tip it is that employee’s responsibility to report the tip to HMRC. The individual must then pay tax on the amount of the tips either through their tax code or through the self-assessment system.

The employer is responsible for paying tax on tips…

If the employer pools all of the cash tips and decides who receives the tips and pays the tips to the employees, then the employer is responsible for the tax. The employer must also account for employees’ and employers’ NIC. This results in a significant amount of the tip being taken in tax and NIC.

The Troncmaster is responsible for paying tax on tips…

If a Troncmaster is appointed, independent of the employer and is solely responsible for the allocation and payment of tips, income tax is deducted and paid by the Troncmaster to HMRC. A separate Tronc PAYE scheme is required to deduct the tax and pay to HMRC. There are no NIC deductions.

With a tronc scheme, about 20% is paid in tax by staff, so employees get the best deal. There’s also no National Insurance cost to the hospitality business. With a tronc, the minimum is paid back to HMRC.

The tronc system is the most prudent way to achieve maximum efficiency. It’s also fair to staff and transparent, which is key when considering the new Employment (Allocation of Tips) ACT 2023.

As you can see, a tronc scheme, run by a troncmaster is by far the most tax-efficient way of managing tips for both the employee and employer.

 Set up a tronc scheme today

In research carried out by IRIS Software and Censuswide (Sep 2022), 67% of hospitality businesses know about tronc schemes, but 46% pay pooled tips without a tronc scheme, meaning 1.2 million hospitality workers are losing out.

Tronc schemes are tax-efficient and HMRC-compliant. They set up the rules around the distribution of pooled tips in a business and are overseen by a ‘Troncmaster’. A Troncmaster must remain independent of business owners, directors, or anyone with hiring responsibilities.

If this all sounds difficult to get right, that’s because it is. As we have learnt, businesses that try to go it alone with their tronc scheme can make mistakes.

Find out how we can take care of everything, so you’ll be worry-free when the new Bill becomes law.

Click here.