The Employment (Allocation of Tips) Act 2023 will officially come into force October 1, 2024. The law aims to ensure all tips, gratuities and service charges are fairly distributed to workers.
Employers are required to allocate 100% of tips to workers with the only permissible deductions being for tax and NIC, however, this can be circumvented if a tronc arrangement is used to distribute tips.
NICs
The new legislation applies mainly to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.
For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.
Troncs
A tronc is an arrangement used to distribute tips, gratuities and service charges. It is run by a troncmaster.
Provided it is the tronc master who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It’s still possible, however, for the tips to be included on the employer’s payroll.
The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer decides on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.
HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.
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