Solicitor Emma Ladd explains the finer points of the employer's responsibility for income tax and national insurance contributions on tips received by staff
The problem
As in most restaurants, my staff get tips from customers. The tips are pooled together and distributed at the end of the night to all staff, including those in the kitchen. Should I be deducting PAYE and national insurance before I hand them over?
The law
Whether you are responsible for deducting PAYE and national insurance contributions (NICs) depends on how your system is operated.
Paye
All tips are taxable as income. However, whether the tax has to be dealt with by the employee or via PAYE depends on the nature of the tip. Cash tips, given to employees by customers where the employer has no involvement whatsoever, fall outside the PAYE system. The employee should contact HM Revenue & Customs (HMRC) to deal with the tax payable on these.
If payments are made to employees by the employer in respect of tips - eg, where the tips are pooled for equal distribution or where a customer pays a tip by credit/debit card or by cheque - the employer is responsible for deducting the relevant amount of tax via the PAYE system.
Tips paid by tronc
A tronc is a special arrangement for distributing tips, gratuities and service charges. It is run by an independent person - the "troncmaster".
Where there is a tronc, the troncmaster is the one responsible for deducting PAYE. The employer should notify HMRC about the identity of the troncmaster. They will then set up a different PAYE system for the tronc. The troncmaster must keep PAYE records for the tronc, even if the employer operates it.
National insurance
If cash tips are paid directly by the customer to the employee, the tips will not be subject to NICs.
If tips are distributed by the employer, NICs must be deducted if the employer decides who gets what. This is the case even if the employer decides that all tips should be paid to the employee who served that customer.
Tips paid by tronc
Payments through a tronc are treated differently. Provided the employer does not determine how much each employee gets NICs will not be due.
To prevent it being seen that the employer is determining the allocation of the tips, the method of distribution should be decided by the troncmaster or a staff committee, not the employer. Preferably, the identity of the troncmaster should also be decided by the staff or a staff committee and should not be the employer, a business partner or official (eg, a director).
Mandatory charges
If you charge mandatory service charges on bills, these are never classed as tips, and tax and NICs should be paid as usual.
Expert advice
Unless most of your tips are paid in cash and kept by the employee, troncs are often the best way of dealing with tips. They are entirely independent (which makes them less prone to fraud) meaning that NICs are not due on the payments, so your employees make a saving.
Check list
Your responsibilities depend on the system you use and you should review it regularly. Consider:
- Are tips paid in cash to the employee?
- Are tips paid through the employer?
- Do you have a tronc?
Beware!
Dealing appropriately with PAYE and NICs is a must, otherwise you might find yourself on the wrong side of the tax man. At the very least, you might be subject to a PAYE audit. Or, if PAYE and NICs have not been paid, you could find yourself faced with a large bill for the unpaid amounts. Failure to deal correctly with PAYE and NICs can also carry criminal penalties.
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