Will new tips rules affect your business?

Will new tips rules affect your business?

A new Act on tipping has been passed with the aim of ensuring that more of what customers leave as tips go to staff. Does this mean you need to update your payroll processes and are there any changes to how tips are taxed?

New bill on tipping

Many hospitality workers rely on tips to top up their pay and are often left out of pocket if employers don’t pass on the service charges from customers to them. To stop this, the Employment (Allocation of Tips) Act 2023 (the Act) was passed on 2 May 2023. It requires employers to distribute 100% of the tips and service charges paid by customers to staff (including any agency workers) in a fair and timely manner. Workers will be able to raise a tribunal claim if they were unfairly allocated tips or not paid them on time, and compensation will be up to £5,000. The Act will also bring in a new statutory code of practice that will provide employers and staff with guidance on how tips should be distributed.

Although the Act has received Royal Assent, the legislation will not actually come into force until 2024 following a consultation on the drafting of the code of practice and secondary legislation.

Changes to payroll processes

It’s not known exactly what will be in the code of practice that employers will need to comply with but there are processes that you can start to put in place if your business doesn’t already have them.

Tips policy. The business should have a written tips policy. This could either be part of the contract of employment or included in the employee handbook or similar agreement. Much like a holiday pay policy, the wording of the policy should be clear to avoid disputes and remain compliant with the Act .

Record of tips. The Act also requires you to keep an accurate record of tips for three years. Your workers will be able to request to see parts of these records and raise a separate tribunal claim if records aren’t kept or if they are refused access.

Taxation of tips

The Act doesn’t make any changes to how tips are taxed but new guidance was issued by HMRC in May 2022 so it’s worth recapping the rules.

Customer pays staff directly. The simplest method of paying tips is allowing employees to keep tips paid directly to them in cash. Funds paid in this way, with no involvement by the employer whatsoever, are the easiest for the employer to handle. The worker keeps the tip, and no PAYE is required.

Although you don’t need to account for PAYE on tips where customers pay staff directly, it’s worth reminding staff that they must declare the amounts to HMRC directly for income tax purposes. They can do this through a self-assessment tax return form, online on their personal tax account or by calling HMRC’s income tax enquiries helpline on 0300 200 3300.

Tips distributed by employer. Where tips of any sort are collected by the employer and paid out to staff – such as when tips are paid by debit or credit card – 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.

  1. NI is payable on any tips paid directly to staff by the employer. The exception is where the business operates a tronc system for tips.

What’s a tronc?

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.

Note. A troncmaster can’t be a director or other office holder in the business as this would mean the employer is still involved in the process so the tips would have to go through the main employer PAYE scheme and be subject to NI.

Pro advice. HMRC sometimes asks why a student loan hasn’t been operated on a tronc payroll. If you’re operating the payroll on behalf of the troncmaster, you should explain to HMRC that student loans are only collected on NIable pay and where the tips aren’t subject to NI, no student loan deductions should be made.

2022 updated tax guidance

In May 2022 HMRC added new guidance to its notice E24 When National Insurance and PAYE is due on tips, gratuities and service charges (see Follow up ). The updated guidance, which is at section 9, is about other forms of electronically paid tips such as via delivery apps.

Example 1.

A restaurant offers deliveries. After the driver has delivered a meal, software automatically sends a text/email to the customer asking if they want to pay a tip to the delivery person. Payments are received by the restaurant which then pays the driver. The tax and NI position is the same as other tips distributed by an employer, i.e. the tips should go through the payroll.

Example 2.

The position is similar to that in Example 1 except that the software links to each driver’s bank account (or the server’s bank account if the meal is taken in a restaurant). When the customer pays a tip it goes direct to the driver/server. The employer is not involved and therefore the payment is not subject to PAYE tax or NI. Instead the employee must declare the tips to HMRC and pay tax on them.

The new Act makes any deductions from tips unlawful and gives workers the right to inspect records to ensure the rules are being followed. The tax rules haven’t changed but HMRC did issue further guidance on electronic tipping in 2022 which clarifies that if the employer receives the tips paid electronically and passes them to its employees, it must apply PAYE tax and NI to the payments.

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