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In many sectors, it is common for workers to receive payment of tips and service charges from customers. If this applies to your employees, you need to be aware of the rules for deducting PAYE tax and National Insurance contributions (NICs) from payments of this kind. The procedures to be followed differ depending on:
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If an employee receives money from compulsory service charges you add to your customers' bills, then you should calculate and deduct both PAYE tax and Class 1 NICs. This is regardless of whether you pay the money direct to the employee or whether it is distributed through a tronc.
A tronc is a system for distributing tips, gratuities and service charges. The person in charge of the tronc is known as the troncmaster. There's more information on troncs and troncmasters in later sections of this guide.
If your employees receive tips directly from your customers and are allowed to keep them, then you do not need to do anything for PAYE tax or NICs. There are no NICs due on the money, and the tax due is the employee's responsibility. Your employees should declare the money to HMRC, who will usually adjust their tax code to collect any tax due.
In general, if you distribute any money from tips or service charges to your employees then you must calculate and deduct both PAYE tax and NICs. This applies to money customers pay to you, including a voluntary gratuity added to a credit card or cheque payment, as well as tips that are received directly by your employees but then given to you to distribute.
The exception to this is when someone else, such as a troncmaster, decides independently of you how much money from tips and service charges an employee should receive, but you pay the amount to the employee. In this instance, you must calculate and deduct PAYE tax but no NICs are due.
If you pass tips and voluntary service charges to a troncmaster rather than distributing them yourself, then the rules outlined in the next section apply instead.
A tronc is an arrangement for pooling and distributing tips and service charges and the person who operates the tronc is known as a troncmaster. If your employees use a tronc you must tell HMRC who the troncmaster is so that they can set up a PAYE scheme for the tronc.
If tips and voluntary service charges are distributed by a tronc, PAYE tax is always due and it is the troncmaster's responsibility to calculate and deduct it.
However, NICs are only due on tronc payments if you, directly or indirectly, allocate the payments to your employees. This means that you decide which of your employees gets money from the tronc and how much each employee should get. If NICs are due on a tronc payment they are your responsibility, not the troncmaster's. You will need to consult the troncmaster to:
Remember, as outlined in the first section above, you are responsible for deducting both PAYE tax and NICs on all money that is distributed from compulsory service charges to your employees - even if it is distributed through a tronc.
More about recording PAYE tax and NICs on form P11
How to treat payments made on a day other than the usual payday
Download E24, 'Tips, Gratuities, Service Charges and Troncs' (PDF 60K)
Download CWG2, 'Employer Further Guide to PAYE and NICs' (PDF 492K)
