Sometimes there can be confusion around tips, tronc, and whether or not they are taxable income. The short answer: yes, tips qualify as taxable income, but in different ways. The tax your tip income is liable to depends on the type of tip and how it’s distributed between employees. Here’s our guide:
For tips processed through a Tronc:
For tips processed through a Tronc system, employers and staff members are exempt from NICs on these amounts. For this, the Tronc system must be registered with the HMRC and must follow all guidelines as outlined in The Employment (Allocation of Tips) Act 2023. If a Tronc is found to be non-compliant, NICs will be payable on these tips and gratuities.
Despite being exempt from NICs, tips processed through a Tronc system are still liable for PAYE. This will be the responsibility of the Troncmaster, whether this is an external Troncmaster or an internal employee. All Tronc PAYE records must be kept separate to the companies PAYE records.
For tips processed through payroll:
For tips that are processed through payroll and paid out with normal wages, PAYE and NICs apply. This is the responsibility of whoever runs payroll in the business; There is no need for an employee to declare these amounts for HMRC as they are treated as regular wages.
For cash or cash equivalent gratuities:
In some businesses, customers may leave the team cash or a “cash equivalent” gratuity. Unless these are collected and distributed via a registered Tronc system, it is the responsibility of the employee to declare additional cash earnings to HMRC for tax purposes. If the employer plays a role in how cash tips are collected and shared, then they must process the PAYE for these amounts.
Tips and VAT:
The good news: tips fall outside the scope of VAT. This also includes discretionary service charges, if the customer is able to choose whether or not to pay it.
For more information on tips, Tronc and tax, visit Gov.UK.
