STAFF TIPS - 13.11.2018

Staff tips - tips and traps

Definitions

Where customers provide tips for staff there are tax and NI rules to consider as well as national minimum wage implications. Such payments tend to fall into one of the following categories: mandatory service charge; discretionary service charge; tip paid as part of a cheque or card payment; cash tip paid into a staff box or similar; cash tip handed directly to a member of staff.

Mandatory v voluntary

Voluntary service charges that are entirely discretionary, so need not be paid by the customer, are not earnings for NI purposes. However, mandatory service charges are classed as earnings, so if they are paid out to staff, NI will always be due.

Tips and tax

Where tips of any sort are collected by the employer and paid out to staff, they are subject to tax through the payroll, i.e. the employer can’t pay them tax free and tell the employee to declare them to HMRC. Where the employer isn’t involved at all as tips are left on the table or given directly to staff, these are not subject to PAYE and are the responsibility of the employee to declare to HMRC.

Troncs

A tronc is a French word for little box, e.g. in which you might collect tips. Employers often set up tronc schemes and give the responsibility for sharing out the tips to a senior member of staff. Where this means the employer no longer has any involvement in allocating the monies, this member of staff must be notified to HMRC as the troncmaster and a PAYE scheme will be set up on their behalf through which the tips are paid subject to tax rather than through the employer’s payroll. The employer can use their own payroll software to run the tronc scheme, but they are in effect then acting as a payroll agent in running the payroll for the troncmaster.

Pro advice. HMRC has a problem at the moment in its systems as it looks at taxable pay in a tronc or employer PAYE scheme and asks why a student loan hasn’t been operated. But as student loans are collected on NIable pay where the tips aren’t subject to NI, no student loan deductions should be made.

Trap. A troncmaster cannot be a director or other office holder in the business as this means the employer is still involved so the tips must go through the main employer PAYE scheme.

National minimum wage

Tips never count for national minimum wage purposes. Ensure that you disregard any amounts related to tips paid through the tronc or main payroll and the correct national minimum wage rate for the employee’s age is always paid for all hours in the pay reference period.

The future

The government will legislate to prevent businesses retaining any tips. This is in response to evidence that emerged a few years ago that many restaurants were routinely retaining up to 10% of the tips charged to credit and debit cards. There is an existing code of practice surrounding the retention of the credit card fees but the government obviously feels that this doesn’t go far enough.