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HMRC internal manual

National Insurance Manual

Tips, gratuities and service charges: Gratuity disregard conditions: Condition 2

Paragraph 5(3) of Part 10 of Schedule 3 to the Social Security (Contributions)Regulations 2001

If an employer does not allocate gratuities or payments in respect of gratuities eitherdirectly or indirectly to the employee the payments can be disregarded from earnings. Thisis referred to throughout this manual as condition 2 of the gratuity disregard.

Payments of or in respect of gratuities to an employee are liable for NICs if the employerallocates the tips directly or indirectly to the employee and the payments do not meetCondition 1.

Liability for NICs will depend on the specific arrangements regarding the distribution ofthe gratuities operated by individual employers.

Meaning of allocate

Allocate means deciding

who is to be the recipient of the payment and

how much the recipient is to get.

The employer does not allocate a payment to a particular earner merely because it is aterm or condition of the employment that the employee is entitled to share in a tronc runindependently of the employer, see NIM02950. Neither is itallocated just because the employer reserves the right to make certain deductions from thegratuities before they reach the tronc, see NIM02943.

Indirect allocation

Indirect allocation refers to cases where the employer does not allocatepayments in person or through an agent (which we regard as a direct allocation). Rather,the employer establishes and controls a system that performs the allocation in such a waythat the allocation can reasonably be said to reflect and give effect to theemployer’s wishes.

If an employer promises or guarantees receipt of a certain amount from the tronc, this maysuggest that the employer has sufficient control over the operation of the tronc toconstitute an indirect allocation of that amount to the earner andfurther investigation may be necessary to establish the facts see NIM02971.

If gratuities are paid via an independently run tronc and the employer is not involved inthe allocation either directly or indirectly, there is no NICs liability.