I’ve just bought a restaurant and I know that the taxing of tips is a tricky area to get right. But can you tell me in a nutshell what the rules are?

1st September 2011

The three basic options you have for the payment of tips are as follows:

  1. You allow the employees to keep their own tips. In this way, any tax or national insurance due is their own responsibility
  2. All of the tips get put into one ‘pot’ (tronc) and you divvy them out amongst the employees. Their tips would then get added to their normal pay and appear as a separate item of pay on their payslip. In this instance, it would be your responsibility to calculate any tax due.
  3. You set up a tronc system but someone else manages it (the troncmaster), such as a manager and they will independently manage the tronc scheme. Again, the tips are put into a ‘pot’ and divided amongst the employees but this time it would be the troncmaster who would calculate the tax due. Unlike the above though, a separate payroll scheme would be required, so they would not appear on their normal payslip.

In order to avoid national insurance arising on the last two options, you would need to ensure that the tips are not:

  • paid, directly or indirectly, to the employee by you and are not monies previously paid to you by customers, or
  • allocated, directly orindirectly, to the employee by you

With regards to the above rules, tips received on cards can cause a bit of a headache, but just remember that last rule. Although you will have received the tip initially and so fail the first test, provided you avoid any dealings with the allocation of them, no national insurance will arise.

Tips and troncs are not a very simple area of the tax system and there are exceptions to the rough guidelines given above. Therefore, you should seek professional advice from your local TaxAssist Accountant before making a decision.

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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