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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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PAYE operation: payments for PAYE purposes: tips, gratuities, service charges and troncs

Tips, gratuities and service charges are payments made by customers for service received and the following provides information about how these payments are handled for PAYE and NIC purposes.

The introduction of the Scottish rate of Income Tax from 6 April 2016 employees will pay tax at the UK (England, Wales and Northern Ireland) or Scottish Income Tax rate(s) depending on the individual’s residency status.

The Income Tax Residency Status screen on NPS will display ‘Scottish Taxpayer’ for the tax year where the individual is liable to pay tax at the Scottish rate(s) and their tax code will have an S prefix. Further information about the Scottish rate of Income Tax is given at PAYE100035.

Note: 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 it, the charge is a voluntary service charge. Where this is not the case the charge is a mandatory service charge.

HMRC will accept that a service charge is voluntary 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 about the charge by staff.

The remainder of this subject is presented as follows

Cash tips - employer not involved

Cash tips handed to employees or left on the table by customers and retained by employees are not subject to PAYE or Class 1 NIC. If employees receive tips in this way they should advise HMRC so that HMRC can amend the employee’s tax code to take account of the tips.

Employer passes tips / service charges to employees

An employer must operate PAYE and Class1 NIC if

  • They pass tips to employees that are

    • Handed to the employer by employees
    • Left in a common box / plate by customers
    • Included in cheque and debit / credit card payments to the employer
  • They pass service charges to employees

The obligation to operate PAYE / NIC remains with the employer where the employer

  • Delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant
  • Passes tips / service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes


Where tipping is a usual feature of a business there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster (which includes the operation of PAYE) there is a tronc for tax purposes and the troncmaster may have to operate PAYE.

From 6 April 2004, the Income Tax (Pay As You Earn) Regulations 2003 require an employer to

  • Notify HMRC of the existence of a tronc created on or after 6 April 2004
  • Give the troncmaster’s name (if known)

There are no hard and fast rules regarding how a tronc should operate and HMRC must apply PAYE and NIC rules to the particular circumstances of each tronc. A troncmaster is not responsible for deducting National Insurance. If NICs are due on tronc payments the employer is required to deduct and account for them (there is further information on NIC below).

When you are notified of a tronc you should

  • Confirm that there is an organised arrangement for sharing tips and determine

    • How the tronc receives monies (for example employees paying in cash tips or an employer paying in credit card tips)
    • Who holds the tronc monies and how (for example, is there a tronc bank account and if so who operates it?)
    • On what basis are distributions made from the tronc and who decides that basis
    • Which employees are tronc members
    • Whether the person said to be the troncmaster accepts and understands the role (including the obligation to operate PAYE)

If you are satisfied that there is a tronc for PAYE purposes (bear in mind that a business could have more than one tronc, for example a hotel could have separate troncs for restaurant staff and housekeeping staff and each should be dealt with separately)

  • Arrange for a PAYE scheme to be set up in the name of the troncmaster. Further information can be found in PAYE20160

PAYE failure

Where someone other than the employer is involved in the distribution of tips it is essential to ascertain the full facts to be able to determine the tax and NIC treatment.

Where there has been a PAYE / NIC failure it is not unusual for the employer to say that the troncmaster is responsible and for the troncmaster to say that he / she was acting on behalf of the employer.

Where there is a dispute regarding PAYE responsibility and if back years are involved consult your local Compliance Team.

If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his / her PAYE obligations, the employer can be directed to operate PAYE on monies passed to the tronc from a specified future date. HMRC directs the employer (under Regulation 100(4) IT (PAYE) Regulations 2003) to operate PAYE on future payments even if the troncmaster distributes the money to tronc members.

Note: If you have a case where you think that a direction to transfer the obligation to operate PAYE from the troncmaster to the principal employer may be appropriate, send it with the full facts to Personal Tax Customer, Product & Process, PAYE Technical, (This content has been withheld because of exemptions in the Freedom of Information Act 2000) .

Employee’s PAYE credit

If the employer or troncmaster fail to operate PAYE, the employees are entitled to a PAYE credit if the tips are included in their Self Assessment. This is so the tax is not collected from the employees.

National Insurance liability on tips, gratuities and service charges

Guidance on NIC liability is given in the National Insurance Manual at NIM02900 onwards.

Class 1 NICs are due where customers

  • Pay a mandatory service charge and the employer passes some or all of these charges onto employees, either directly or by using a tronc. Regardless of who pays the charges to the employees the employer, not the troncmaster, is responsible for the NICs
  • Pay voluntary service charges and / or tips to the employer


* The employer passes all or some of the charges / tips to employees  
* The employer passes some or all of the charges / tips to a tronc and decides or directs who should be paid from the tronc and how much they should receive

Class 1 NICs are not due where

  • Customers pay tips direct to employees and the employer is not involved
  • Customers pay voluntary service charges and / or tips to the employer
  • The employer passes some or all of the charges / tips to a tronc
  • The employer is not involved in deciding how much each tronc member receives from the tronc

Further advice

Advice for employers and troncmasters is available in the following products, which are both available on the HMRC website

  • Booklet E24, Tips, Gratuities, Service Charges and Troncs
  • Booklet CWG2, Employer Further Guide to PAYE and NICs