Q. My employees receive tips and gratuities from customers and I understand that depending on how I allow my staff to treat these receipts my responsibilities to charge tax/NIC under PAYE regulations are different. Can you clarify the current position for me and under what circumstances the rules change?
A. Yes you are correct and this is an area that can cause confusion.
For those employers who allow employees to receive tips directly from your customers and they are allowed to keep them without reference to yourself or any other member of staff, 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 employees 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 as the employer 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 tip 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.
If you levy compulsory service charges on your customers 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).
The exception to this is when someone else, such as a troncmaster, decides independently how much money from tips and service charges an employee should receive. 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 tronc rather than distributing it yourself, then the rules outlined below will 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 troncmasters responsibility to calculate and deduct it.
However, NICs are only due on tronc payments if you have a role in deciding 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 troncmasters. You will need to consult the troncmaster to:
- find out the amount being paid and the date of payment
- include the payment in the employees gross pay when calculating NICs (but not PAYE tax) and update their form P11 or equivalent payroll record accordingly
Remember, as outlined 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.
As you can see from the above this is a complex area with many pitfalls. If you have any questions then please contact Taxwise on 01455 852555.