Guidance

Guidance on tips, gratuities, service charges and troncs

Updated 5 May 2022

1. Introduction

This guide is for employers and those responsible for arrangements to share tips, gratuities and service charges amongst employees in the catering and service industries. It covers the treatment of tips, gratuities and service charges for Income Tax, National Insurance contributions, National Minimum Wage and VAT purposes, including the treatment where a tronc exists.

This guide is not exhaustive and does not cover every situation. If you are in any doubt, you can get advice from HMRC (see section 13).

2. Overview

A customer may make different types of payment on top of the basic charge, but usually it will be one of the following:

• mandatory service charge
• discretionary service charge
• gratuity paid to the employer as part of a cheque, credit or debit card payment
• gratuity paid into a staff box or similar
• gratuity handed or paid directly to an employee

This guide explains the treatment for each of these types of payment.

3. Definitions

Tip or gratuity

A tip or gratuity is an uncalled for and spontaneous payment offered by a customer. This can be in cash, as part of a cheque payment, as a specific gratuity on a credit or debit card payment or paid using a digital payment service or application.

Service charge

A service charge is an amount added to the customer’s bill before it is presented to the customer. If it is made clear to the customer that the charge is a purely discretionary amount and there is no obligation to pay, the payment is a voluntary service charge. Where this is not the case, the payment is a mandatory service charge. If you impose a mandatory service charge and the money is paid out to your employees, National Insurance contributions are always due on the payments no matter what the arrangements are for sharing out the money.

HMRC will accept that a payment is a voluntary service charge if it is clearly presented to the customer as an entirely optional payment.

The literature seen by the customer should reflect this and be consistent with advice given to customers by employees. Any amount entered on an ‘open’ credit or debit card slip by a customer is likely to be a gratuity.

Tronc

A tronc is a special pay arrangement used to distribute tips, gratuities and service charges.

Troncmaster

A troncmaster is the person, other than the employer, responsible for arrangements to share tips among employees.

Tips, gratuities and voluntary service charges will be referred to simply as tips in the rest of this guide.

4. VAT

Tips are outside the scope of VAT when genuinely freely given. This is regardless of whether:

• the customer requires the amount to be included on the bill
• payment is made by cheque or credit or debit card
• the amount is passed to employees

Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore standard rated.

If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not a consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.

More information is available from Notice 700 VAT guide and Notice 709/1 Catering and takeaway food. Go to VAT notices or contact the HMRC VAT helpline.

5. Income Tax

If customers give or pay tips directly to employees or leave them on the table and individual employees keep them without any involvement from the employer, then PAYE does not apply. Tax will be due on these amounts, but no National Insurance contributions will be due.

It is the responsibility of the individual employee to advise HMRC of the amounts received by either including how much they received in tips in their Self Assessment tax return or reporting the amount of the tips received to HMRC. The tax will usually be recovered by an adjustment to the employee’s PAYE tax code.

If your employee does not fill out a tax return then they must report the amount of tips they have received. They can do this either online using the personal tax account or by calling HMRC’s Income Tax enquiries helpline.

HMRC will give the employer an adjusted tax code so they can collect any additional tax through PAYE. This is where tax is taken from the employee’s wages before they get them.

Employees can contact HMRC using their personal tax account or by calling HMRC’s Income Tax enquiries helpline if they think their tax code is wrong or to report the tips they have received.

PAYE must be operated on all tips paid by an employer to an employee. Responsibility for operating PAYE rests with the employer even if the employer delegates the task to an employee if there is a tronc operating. You can find more advice at section 6.

There may be arrangements where:

• someone other than the employer decides how tips are shared amongst employees but does not handle the tips or have control of them
• the employer makes the payment

If arrangements like this are in place, the employer is responsible for operating PAYE on the tips.

Guidance on the operation of PAYE can be found on the GOV.UK website:

• employer helpbook CWG2 employer further guide to PAYE and National Insurance contributions
• PAYE and payroll for employers
• rates and thresholds for employers
• Payroll: annual reporting and tasks

Example 1: tips paid by credit or debit card

Mr F, the proprietor of a restaurant passes on all tips paid by credit or debit card to his employees.

Mr F has made a payment to his employees and must operate PAYE on these payments as part of the normal payroll.

Example 2: tips left on tables in cash

Ms D, the proprietor of a restaurant, tells employees that all tips left on the tables in cash must be handed to her so that she can ensure the kitchen staff get a share. She shares out all the cash tips amongst all employees at the end of each day.

Ms D is involved in the sharing out of the tips. She must include the amounts received as part of the payroll and operate PAYE.

6. Income Tax and troncs

A tronc is run by someone usually known as a troncmaster. Where the troncmaster is in control of the tips and responsible for sharing them amongst employees, the employer must tell us unless the arrangement came into existence before 6 April 2004. This is so we can identify the person responsible for PAYE in each period.

We may check an arrangement exists to share tips amongst employees and that the troncmaster accepts that role. A PAYE scheme will be set up for the tips in the troncmaster’s name unless different PAYE arrangements need to be made.

The troncmaster is personally responsible for all aspects of operating a PAYE scheme. They may be held responsible for any failure to deduct tax from payments from the tronc. Troncmasters who need help in understanding their PAYE responsibilities should contact us for advice.

A troncmaster with a PAYE scheme may use the employer’s payroll to operate PAYE on their behalf (the employer effectively acting as a payroll agent), but the troncmaster’s PAYE records must be kept separate from the employer’s. The tronc PAYE scheme must be entirely independent of the employer’s scheme and must be run as such.

Example 3: troncmaster responsibility

Ms T opened a bistro in 2007. She allows the employees to keep all the tips left in cash and passes to them the tips received by cheque and credit or debit card in full. Mrs B, the head waitress, offers to collect all the tips and distribute these to the other employees each week. Ms T has no involvement in this at all.

Mrs B is running a tronc and is the troncmaster. Ms T must tell the HMRC office that deals with the PAYE for the bistro, of Mrs B’s appointment and any future change of troncmaster.

If the employer, business partner or an official of the company (for example, a director) performs the role of troncmaster, they are considered to be making payments as if they were the employer and therefore the payments should be paid through the employer’s payroll.

Example 4: employers acting as troncmasters

Mr J, a director of Hotels Ltd (the employer), is chosen by the employees to act as troncmaster.

Because he is an official of Hotels Ltd, all payments made by the tronc must be paid through the Hotels Ltd company payroll. Responsibility for operating PAYE on these payments will rest with Hotels Ltd and not Mr J as troncmaster.

Where the employer is involved in deciding the distribution of tips amongst employees or if mandatory service charges are distributed through the tronc, the employer is responsible for operating PAYE. This applies even if responsibility for making distributions to staff is delegated to a trusted employee.

An employer who is unsure of their responsibilities regarding PAYE should check with us before such payments are made.

Example 5: tips left in a drop box

Mrs L, the proprietor of a casino allows her gaming staff to keep any money paid in tips or left for them on gaming tables. These amounts are placed in the drop box by the gaming table. This money is kept separate from gaming money and is passed to the troncmaster for allocation amongst the gaming staff who are part of the scheme.

As Mrs L is not deciding how the tips are allocated, the troncmaster is responsible for operating PAYE on them.

7. National Insurance contributions

Legislation provides that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’, is exempt from National Insurance contributions if it meets either of the following 2 conditions:

• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example, by customers
• it is not allocated, directly or indirectly, to the employee by the employer

By ‘allocated’ we mean deciding who should receive what amount by way of tips. Whether either of the conditions apply will depend on the facts.

In most cases where you pass tips to an employee, you are liable for both employer and employee National Insurance contributions because neither of the 2 conditions are satisfied.

If someone other than you is responsible for allocating the tips, see section 8 for more guidance. You should contact HMRC for advice if you are responsible for allocating tips, you pass tips to your employees or if you consider that you are not allocating the tips.

Example 6: tips received by cheque, debit card or credit card

Mr R, the proprietor of a restaurant, decides that all cheques and credit or debit card tips paid by each customer should be passed on to the employee who served that customer.

The tips received by cheque and credit or debit card are initially paid to Mr R, so they represent monies previously paid to the employer and therefore the first condition for exemption (set out in the opening paragraph) cannot be satisfied. The second condition is also not satisfied. The tips are initially paid to Mr R. He then decides who should receive what amount. Therefore, Mr R has allocated the tips to the employees. National Insurance contributions are payable on these tips.

Example 7: cash tips left on table

Mrs W, the proprietor of a restaurant, intends that all the tips left on the tables in cash will be paid to employees. To ensure the kitchen staff get a share, she collects them and shares them out to the waiting and kitchen staff at the end of each day.

Neither of the conditions for exemption is satisfied. In relation to the first condition, Mrs W has paid the tips to her employees. In relation to the second condition, she decides on the allocation. National Insurance contributions are payable on these tips.

Payments you are legally obliged to make to employees, such as payments which form part of a contractual arrangement or undertaking, cannot be accepted as being payment ‘of a gratuity’ by the employer.

A contractual payment is any payment made to an employee as part of an agreement between the employee and their employer, such as:

• any payment that forms part of the terms and conditions of the employment
• a payment that is promised, guaranteed, or underwritten by the employer even if the payment (or part of it) is paid by a third party

If, however, tips are paid to the employer, the subsequent payment from the employer to the employee, even if the payment is a contractual payment, can still be ‘in respect of’ a tip. If a payment by the employer is ‘in respect of’ a tip, National Insurance contributions are due if the employer allocates the payment directly or indirectly to the employee, but National Insurance contributions are not due if the employer does not allocate the payment.

Example 8: employer making up shortfall in minimum tips agreement

Mr N, the proprietor of a restaurant, agrees a minimum amount each employee will receive in tips. He promises to make up any shortfall if the tips do not reach the minimum amount when he distributes all the tips at the end of each week.

Where Mr N has to make good his promise, he is meeting a contractual obligation out of his own pocket and as these payments are neither ‘tips’ nor ‘in respect of’ tips, National Insurance contributions will be due on the payment.

Where Mr N does not have to make good his promise, the payments he makes derive from the tips paid by the customers, so are payments in respect of tips.

Mr N satisfies neither of the conditions for exemption because he decides how the tips would be allocated and pays the amounts to the employees. So, National Insurance contributions are also due on these payments.

8. National Insurance contributions and troncs

Where payments made from a tronc attract National Insurance contributions liability, the troncmaster is not required to pay National Insurance contributions on those payments. Responsibility for calculating any National Insurance contributions due and making payment to HMRC rests with the employer.

Payments of tips do not attract National Insurance contributions if the:

• troncmaster is allocating money that originally was not paid to the employer and the employer does not pay the money directly or indirectly to their employees
• employer does not determine, directly or indirectly, the allocation of those tips

By allocation we mean deciding who should receive what amount by way of tips.

Example 9: payment in respect of tips

Ms O, the proprietor of a restaurant, includes in the chef’s terms of employment that he will get £200 wages and £400 from tips each week. At the end of each week Ms O deducts £400 from tips to pay the chef. Ms O passes the balance of tips to Mr A, the troncmaster. Mr A decides entirely independently of Ms O which employees will get payments from the tronc and the amounts each will receive.

The £400 per week from tips paid by Ms O to the chef, are payments in respect of tips. National Insurance contributions are due on the wages and the tips paid by Ms O because:

• she pays that amount direct to the chef
• the amount paid to employees is from money paid by customers to Ms O
• Ms O allocates that amount to the chef

However, Ms O is not involved in the allocation of the tips paid by Mr A because she is not involved in determining who should receive the tips and how much each employee should receive. If Mr A chooses to pay the chef any amounts from the tronc monies Ms O passes to him, no National Insurance contributions will be due on those amounts.

Example 10: staff committee decide allocation of tips

Mr Z runs a casino. Tips paid by cash, cheque and credit or debit card are all passed to Ms P, the troncmaster, who has been appointed by Mr Z. Ms P operates PAYE on the tips that she distributes. A staff committee decides on the allocation and Mr Z has nothing to do with this.

Even though Mr Z has appointed Ms P as troncmaster he has played no part, directly or indirectly, in the allocation of the tips because he is not involved in determining who should receive tips and how much each employee should receive. In these circumstances, no National Insurance contributions will be due on the tips received by the tronc members.

Example 11: points system

The facts are the same as in example 10 except that rather than the staff committee allocating the tips, Mr C requires Ms G to operate a points system he devised.

Mr C is indirectly allocating the tips because Ms G is effectively carrying out Mr C’s wishes as regards allocation of the tips. All tips paid out from the tronc will be liable for National Insurance contributions. Mr C will be liable for operating National Insurance contributions on the payments.

But if the staff committee or Ms G decide themselves to adopt and use the points system and there is no element of compulsion, then Mr C has not been involved in the allocation and National Insurance contributions are not due.

Example 12: when tips are retained

The facts are the same as in example 10 except that Mr K chooses to retain some of the tips received by cheque or credit or debit card to cover card charges.

Mr K is affecting the overall amount available for allocation. But he does not determine who should receive the tips and how much each employee should receive. He does not directly or indirectly allocate the tips. Ms M allocates the tips according to rules determined by the staff committee. No National Insurance contributions are therefore due on the tips distributed from the tronc.

Example 13: participation in a tronc scheme

Mrs E is the proprietor of a restaurant. In the employment contracts of all her employees she includes a right to participate in the tronc arrangements. That right leads her employees to expect they will receive a share of the tronc.

Mrs E does not get involved in allocating the payments nor does she make any further payments to supplement the tips payable.

Tips paid from the tronc in such circumstances will not be liable for National Insurance contributions. Although there is a right to participate in the tronc arrangements there is no contractual right to receive payments of any specified amount out of the tronc.

Example 14: top-up payments

Mr H, the proprietor of a restaurant, agrees with his employees a minimum amount each will receive in tips from the tronc. At the end of each week the troncmaster tells Mr H whether a top-up payment is required to ensure that the employees receive the minimum amount of tips.

Mr H has a legal obligation to make contractual payments to the extent he makes any top-up payment. The existence of the legal obligation prevents top-up payments from being a tip. Nor are they payments in respect of tips.

National Insurance contributions are also due on the minimum payments derived from tips if Mr H directly or indirectly allocates those payments.

If employees receive amounts from the tronc that exceed the minimum amount and Mr H does not directly or indirectly allocate those payments, no National Insurance contributions will be due on amounts paid in excess of that minimum.

Example 15: employer input into a tronc scheme

Mr McA and Mr McB run a restaurant. The tips are paid from a tronc run by Mr McC. The other employees elected him. He decides who will participate in the tronc arrangements and how much each participant will get. Mr McC has chosen to restrict tronc membership to those who have worked in the restaurant for a minimum of 6 months.

Mr McA and Mr McB point out to Mr McC there are problems with recruitment. They suggest Mr McC might consider extending participation in the tronc but it is clear they do not impose anything regarding the way Mr McC operates the tronc arrangements. Mr McC decides, with his employees’ approval, to allow all his employees to participate in the scheme.

Mr McA and Mr McB have influenced who shall participate in the tronc arrangements, but they have not determined how much each person receives. They are not directly or indirectly allocating the tips because Mr McC continues to determine who gets what. Therefore, in these circumstances no National Insurance contributions are due on the tips distributed by the tronc.

9. Tips paid electronically

Customers can also pay tips in an electronic format, such as through a digital application designed for the purpose, rather than making a payment direct to either an employer or an employee by card or in cash. This does not change any of the basic principles that apply as set out in this guide for deciding how tax is to be accounted for on those tips and whether a National Insurance liability arises.

Example 16: no independent troncmaster

Restaurant Y is a national company and has introduced an electronic payment platform to distribute tips to its delivery drivers employed in its franchise stores as a substitute for cash tips.

After their order is received, the customer is sent an email or text inviting them to pay a tip electronically. The payment is received by a central team at restaurant Y headquarters and following a 14-day cooling off period, the central team distribute the payment to the appropriate store. The store then links the payment to the individual driver and pays that amount to them, minus a small transaction fee.

Restaurant Y initially receives all tip payments and subsequently distributes those payments through a mechanism the company has devised. There is no independent troncmaster in place to determine how tips should be distributed. The company is therefore facilitating the payment and effectively deciding on how the tips are to be allocated. This is not changed by the fact that this decision is linked to the amount of tips initially paid by individual customers.

National Insurance contributions are payable on these tips. Income Tax is also payable and both Income Tax and National Insurance contributions should be accounted for through PAYE.

Example 17: tips paid to employees by a third party app

Mr Y runs several takeaway chicken stores and also offers a delivery service, employing a dozen or so drivers. Mr Y has allowed his drivers to use a third party downloadable app which customers can use to pay tips directly to the individual employee instead of giving a cash tip on delivery.

The customer is able to download the app to their mobile phone and configure it to their bank account, which allows payment to be made directly to an individual driver. The driver is able to transfer any tips they receive through the app to their personal bank account and is then free to do as they wish with that money. The money does not pass to Mr Y at any point and Mr Y does not have any say in how the drivers are required to use the tips once they are received.

Tips paid direct to employees in this way have all the characteristics of cash tips paid directly to employees with no employer involvement and should therefore be treated in the same way. No National Insurance contributions are due and PAYE will not apply. It will be the responsibility of the employees to advise HMRC of the amounts of money received and tax will usually be recovered by an adjustment to the employee’s PAYE code.

Example 18: employer offers tips to be paid by third party app

Mr X owns a restaurant and employs a dozen or so chefs and waiting staff. Mr X has placed a link to a downloadable, third party app on his restaurant tables which customers can use to pay tips directly to an employee or to all employees working at the time of their visit, instead of leaving a cash tip on the table or adding a tip to a card payment.

The customer is able to download the app to their mobile phone and configure it to their bank account or debit or credit card, which allows payment to be made directly to an individual or individuals’ account.

The employee is able to transfer any tips they receive through the app to their personal bank account and is then free to do as they wish with that money. The money does not pass to Mr X at any point and Mr X does not have any say in how the staff are required to use the tips once they are received.

Tips paid direct to employees are paid directly to employees with no employer involvement and should therefore be treated as such. No National Insurance contributions are due and PAYE will not apply. It will be the responsibility of the employees to advise HMRC of the amounts of money received and tax will usually be recovered by an adjustment to the employee’s PAYE code.

10. National Minimum Wage

The right to be paid the National Minimum Wage is a statutory right. Regardless of any written or oral agreement between the employer and the worker, the law makes it clear that the worker has a statutory right to be paid at least the National Minimum Wage by their employer.

For pay reference periods which start on or after 1 October 2009 amounts paid by the employer to the worker which represent tips, gratuities, service charges or cover charges paid by customers do not count towards National Minimum Wage pay.

For pay reference periods which started prior to 1 October 2009, tips, gratuities, service charges and cover charges could count towards National Minimum Wage pay if they were paid by the employer to the worker through the employer’s payroll.

11. Reviews of records

From time to time HMRC carry out reviews of employers’ records to make sure things are in order for PAYE, National Insurance contributions and separately for National Minimum Wage. If there is both an employer PAYE scheme and a tronc PAYE scheme then it is likely, though not automatic, that records for both schemes will be reviewed at the same time.

12. Legislation

The tax legislation relating to arrangements to share tips is contained within regulation 100 of Income Tax (Pay As You Earn) Regulations 2003 (SI 2003 Number 2682).

For National Insurance contributions purposes the legislation relating to ‘gratuities and offerings’ which can be disregarded from liability when calculating earnings is contained at paragraph 5, part 10, schedule 3 of the Social Security (Contributions) Regulations 2001 (SI 2001 Number 1004).

The National Minimum Wage legislation relating to tips, gratuities, cover and service charges that do not count for National Minimum Wage pay purposes is contained at regulation 31(1)(e) of the National Minimum Wage Regulations 1999 (SI 1999 Number 584).

13. Help and guidance

You can get help and guidance from the following sources.

Online information

For help with your payroll, read PAYE: detailed information.

For wider interactive business help, read set up a business.

Webinars are a way of learning about your payroll, such as ‘Getting payroll information right’. This webinar covers the most common errors that employees make when submitting information to HMRC. It shows you how to provide accurate data and avoid common payroll mistakes.

For more information, read help and support for employing people.

Any page printed from the online version of this helpbook is uncontrolled and may not be the latest version. We recommend that you always check you are referring to the latest online version.

Online services

For information and help using our online services, read HMRC services: sign in or register.

For more help, contact the online services helpdesk.

Basic PAYE Tools

The Basic PAYE Tools is software that you download onto your computer. It will help you run your payroll throughout the year. It’s designed for employers who have 9 or fewer employees, and you can use it to calculate payroll deductions and then report payroll information online in real time.

To find out more information about the Basic PAYE Tools and other HMRC recognised software, read find payroll software.

Employer helplines

If you have:

• been an employer for less than 3 years, contact the support for new employers helpline
• been an employer for 3 years or more, contact the general helpline for employers

Tell us your employer PAYE and accounts office references when you contact us. You’ll find them on correspondence HMRC has sent you.

Employer helpbooks and forms

Helpbooks and forms are available to download, read payroll forms, tables and helpbooks for employers.

Forms and guidance in Braille, large print and audio

For details of employer forms and guidance in Braille, large print and audio, contact the employer orderline and ask to speak to the Customer Service Team.

Telephone: 0300 123 1074
Monday to Friday: 8am to 6pm

Find out about call charges.

Help and support from the Digital Delivery Team

There is a lot of help and information available on our HMRC videos, webinars and email alerts pages.

HMRC online Customer Forum

Our HMRC online Customer Forum is for you — with all the help, support and guidance you need.

You can ask questions, see what others are asking and get the answers and top tips you need to support you in running your business

Employer bulletin online

HMRC employer bulletins contain information and news for employers. We publish these 6 times a year.

Employer email alerts

We strongly recommend that you register to receive employer emails to prompt and direct you to:

• each new edition or news about the Basic PAYE Tools
• the employer bulletin
• important new information

Register for the HMRC employer email alert service.

Do you use PAYE Online

Remember to keep your email address up to date. If you change your email address, update PAYE Online to ensure you continue to receive email alerts when we have issued tax codes and generic notifications.

HMRC

If you have a query about your PAYE scheme, contact HMRC.

Tell us your employer PAYE and accounts office references when you contact us. You’ll find them on correspondence HMRC has sent to you.

Your rights and obligations

The HMRC Charter explains what you can expect from us and what we can expect from you.