Understanding the Tax and National Insurance Treatment of Tips in 2025
The hospitality industry has long navigated the complexities of tips, gratuities, and service charges. With the introduction of the Employment (Allocation of Tips) Act 2023, which came into effect on 1 October 2024, new rules ensure that all tips received by businesses are distributed to workers without employer deductions, except for statutory deductions where applicable.
One of the key considerations for employers and employees alike is how tips are treated for tax and National Insurance Contributions (NICs). The treatment depends on how the tips are distributed, whether by the employer directly or via a Troncmaster under a tronc arrangement.
What is a Tronc Arrangement?
A tronc is a system in which tips are pooled and distributed by a Troncmaster—someone who is not the employer. Under this arrangement, the Troncmaster must set up a separate TRONC PAYE scheme in accordance with SI 2003/2682, reg. 100, ensuring compliance with HMRC regulations.
HMRC guidance (E24), updated on 2 December 2024, confirms that the Employment (Allocation of Tips) Act 2023 does not change how tips should be assessed for tax and NICs.
Tax and National Insurance Treatment: Who Pays What?
The key distinction in tax treatment is between who is responsible for paying out the tips and who allocates them. While PAYE (income tax) is based on who makes the payment, NICs depend on who allocates the tips.
Paragraph 5 of the Social Security Contributions Regulations 2001 (SSCR 2001, Sch 3) states that a payment of a gratuity is exempt from NICs if it meets one of the following conditions:
- It is not paid, directly or indirectly, by the employer and does not represent funds previously received by the employer from customers.
- It is not allocated, directly or indirectly, by the employer.
Different Scenarios in Tip Distribution
To clarify how tax and NICs apply, here’s a breakdown of the key scenarios within the hospitality sector:
- Cash Tips Paid Directly to Employees by Customers
- Income Tax: Employees are responsible for reporting these tips to HMRC through self-assessment or tax code adjustment.
- National Insurance: No NICs are due as these payments do not pass through the employer.
- Tips Allocated and Paid by a Troncmaster via a TRONC PAYE Scheme
- Income Tax: Tips are subject to PAYE.
- National Insurance: No employer or employee NICs are due, as the allocation is made independently of the employer.
- Tips Allocated and Paid by the Employer via Their Own PAYE Scheme
- Income Tax: Tips are subject to PAYE.
- National Insurance: Both employee and employer NICs are due, as the employer is directly responsible for allocating and paying the tips.
Key Takeaways
- Employers should carefully consider how tips are allocated to ensure compliance with tax and NIC regulations.
- A properly established tronc arrangement can help employees avoid NIC deductions on their tips.
- Employees receiving cash tips must report them to HMRC, as they remain taxable income.
As the rules surrounding tips continue to evolve, staying informed and ensuring compliance is crucial for businesses in the hospitality industry. Employers should seek professional advice or consult HMRC guidance to ensure they are managing tips correctly and fairly for their staff.
For more information, visit GOV.UK’s official guidance on tips, gratuities, service charges, and tronc arrangements.
Need Expert Guidance? Contact RiverView Today!
At RiverView Portfolio, we specialise in helping hospitality businesses navigate complex tax and payroll regulations. Whether you need assistance setting up a compliant tronc system or advice on optimising your tip distribution process, our team is here to help. Get in touch with us today to ensure your business stays compliant and your employees receive their rightful earnings.
📞 01249 816810
📧 info@riverviewportfolio.co.uk
