Do you run a business where tips and gratuities are common?
Do you as an employer help administer these payments to staff, or is this handled through a tronc scheme?
If you answered yes to the above then you need to be aware of new legislation in the form of The Employment (Allocation of Tips) Act 2023. This is set to come into effect from 1 October 2024 and it means if your business is based in England, Scotland, or Wales then you'll need to operate within a new set of legislation concerning how you distribute tips and gratuities to your staff.
The amends to the law don't impact on the tax, or social security treatment, of tips. However, if you have to make changes to your back office systems and processes as a result of this, then that could impact on your pay as you earn (PAYE) and National Insurance Contributions (NICs) exposure. In this blog post we explain the new rules and what you need to consider from a taxation and compliance perspective.
| How to report tips and gratuities | Taxation |
| What you need to comply with | How tips are taxed |
| The aim of the new legislation | How to plan for the new legislation |
Under the Employment (Allocation of Tips) Act 2023, employers responsible for administering tips are required to maintain records of tip allocation and distribution for a minimum of 3 years from the date received. Staff have the right to request specific records, which must be provided within 4 weeks of the request date. Details on tax liabilities and National Insurance are included later in this post.
If you receive tips directly from customers as an employee however, it is your responsibility to record and report them to HM Revenue and Customs (HMRC). You report your tips by including them in your income declaration in your Self Assessment tax return.
The purpose of the new regulations is to try and guarantee that workers (including qualifying agency workers) receive the full benefit of these payments.
For clarity when reading this blog pot, ‘qualifying tips' refer to those received by your business and then distributed to workers, or those received directly by your workers but are subject to the control, or significant influence, of your business prior to being distributed to your staff.
The new laws mean your business will be required to:
Workers will now be legally equipped to enforce these new obligations should there be a dispute that then ends in an Employment Tribunal.
Of note, tips received directly by workers, where your business doesn't control or influence distribution, isn't covered by the new legislation.
The legislation will outline what constitutes 'fairness' and the areas in which businesses must make decisions about how to comply with their new obligations. It will also detail how these principles should be implemented in the workplace.
As noted earlier, failure to adhere to the law in your systems and processes means evidence of negligence may be used in potential Employment Tribunal cases. Therefore you need to understand the laws thoroughly and ensure that your business policies align fully with them.
As part of the process, The Department for Business & Trade ran a consultation survey that finished on 22 February 2024. It was available for businesses to fill in at their discretion containing 34 questions that asked respondents:
A summary of the responses will be published at some stage in the Spring of 2024 and this will then be followed by policy guidance for impacted organisations.
The Employment (Allocation of Tips) Act 2023 and the statutory Code of Practice do not alter the tax and social security treatment of tips. Therefore, the reporting and payment of income tax on tips, as well as the determination of employee and employer National Insurance Contributions (NIC), still depends on how your business makes payments to employees, plus how those tips are managed, or distributed.
It is important for businesses to consider that any adjustments made to their systems and processes to comply with the new employment regulations could impact on their PAYE and NIC withholding obligations. For instance, if a troncmaster's operation needs to be altered due to the identification of unfair practices, there may be potential NIC implications.
If you, as the employer, distribute all tips to employees through a tip policy or by implementing a discretionary service charge, or a combination of both, then this means that PAYE and both employee and employer NIC liabilities will be due.
A tronc scheme is a method for collecting and distributing tips and discretionary service charges and it's managed by a 'troncmaster'. This has to be a person who is independent from the business leadership/ownership. They then decide how tronc funds are divided amongst the participants.
The role of the employer (you) can only be to appoint, replace, or remove a troncmaster. You can't dictate how funds are allocated, at best you can only offer the torncmaster some practical and administrative support.
Tips and voluntary service charges distributed through a well-run tronc scheme are subject to PAYE but not NIC. Potential NIC savings mean that tronc arrangements can face scrutiny from HMRC during employment tax compliance checks.
If tronc schemes are incorrectly structured or operated, additional liabilities like student loan deductions, apprenticeship levy, and pension contributions may arise alongside underpaid NIC. It is crucial to seek tax and payroll advice when implementing a new tronc scheme, or making changes to an existing one.
When employees are tipped directly from customers, this means there is no formal pooling or distribution system for tips in place. Consequently the employee is obliged to report this additional income through their self-assessment tax return, and there will be no NIC liability. This method of tipping means there's no employer tax or NIC obligations.
It would be wise to review your current practices for managing tips and gratuities carefully. This will then allow you to assess what, if any, measures you may need to implement to ensure compliance with the new regulations coming into effect on 1 October 2024.
Start by reviewing and thinking about the following:
You need to identify and monitor your staff that are likely to be impacted by the new rules. The regulations will cover employees, and qualifying agency workers in Great Britain, but will exclude individuals with different employment rights to those in Northern Ireland.
Determine which exact arrangements are likely to be subject to the new rules? Identify tips managed by you as the employer. Do you have control, or significant influence, over tips collected and distributed by employees?
Can you prove that your current tip policy is fair and transparent? How do your existing arrangements adhere to what has been set out in the draft Code of Practice?
Identify issues and establish guidance and systems to address any gaps.
What operational changes will be necessary? As an example, any deductions from the tronc fund to cover administrative support to your troncmaster will potentially no longer be permissible from October.
Could there be implications for your PAYE and NIC position? Changes in processes to adhere to the new employment law requirements may impact your tax obligations related to employee tips.
Firstly, you need to ensure that your historical tax compliance regarding tips and gratuities is accurate. Then consider whether your workers are fully informed and understand their own personal tax reporting responsibilities.
Be sure to review both the final Code of Practice and additional non-statutory guidance before adjusting, or creating new processes. By addressing this and the above points with an advisor, you can then prepare effectively and ensure potential compliance with the new laws.
The content of this post was created on 24/04/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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