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It is reported that there are over 165,000 businesses, employing 1.3 million workers in which tipping is common. Due to this it is vital as an employer to remain compliant when handling tips and dealing with minimum wage…

Above all, in any circumstances, tips cannot be used to make up an employees National Minimum Wage but they must be paid on top of their wage.

What?

A tip or gratuity is money given by a customer in return of good service.

How?

Tips can be received by employees in a number of ways;

  • Cash paid directly by a customer.
    • In this case employees will have to pay tax on their tips but not National Insurance.
    • A self-assessment should be filed by the employee to report the tips, if the employee doesn’t do this HMRC will estimate tips based on information from the employee/employer and deduct tax through PAYE.
  • Part of an employee’s pay packet (should be clearly shown on a payslip).
  • An amount that is accumulated and distributed between all staff members – this is called a tronc (we’ve got more details on this below!)
  • Service charges.
    • Compulsory service charges should be handled in the same way as tips paid in an employee’s wages, tax and National Insurance deductions will be deducted through PAYE.

Tronc Scheme

A tronc scheme allows tips, gratuities and service charges to be distributed between employees. The ‘tronc master’ (employee in charge of the scheme) distributes the tips and takes care of the PAYE (tax and NI contributions) that should be made on the shared payments.

Employers can also save on NI contributions using the tronc scheme as they are not receiving money, paying it to their employees or determining how much they receive.

Payroll Penny’s Top Tip;

As an employer take guidance from the ‘Code of Best Practice’ and ensure that employees are clear on your policy on service charges, tips and gratuities including their breakdown and distribution. Any changes in policy should be discussed with employees.

A clear policy ensures that are no discrepancies and employees have peace of mind.

 

Stay compliant and make sure you’re not making any of the Top 7 Minimum Wage Mistakes and check out our blog.