Tronc schemes and National Insurance

What a tronc is

HMRC's guidance E24 describes a tronc as "a special pay arrangement used to distribute tips, gratuities and service charges". The person who runs it is the troncmaster, defined in E24 as "the person, other than the employer, responsible for arrangements to share tips among employees". The statutory code of practice on tips says the troncmaster can be a member of staff appointed by the employer, a member of staff elected or agreed by the workers, or an outside payroll or accountancy firm, and that "care is needed to maintain independence".

A tronc decides two things: how tips are shared among staff, and how they are taxed. Income tax is due on tips however they are paid. Whether National Insurance is also due depends on who decides who gets what.

The two National Insurance tests

E24 section 7 says a payment of a tip, or a payment in respect of a tip, is free of National Insurance if it meets either of two conditions:

1. it is not paid to the employee by the employer, directly or indirectly, and does not represent money first paid to the employer, for example by customers
2. it is not allocated to the employee by the employer, directly or indirectly

"Allocated" means deciding who should receive what amount. A card tip reaches the employer first, so it can never meet the first condition. For card and app tips that pass through the business, the only question is the second one: whether the employer decides the shares.

E24 states the usual result plainly: "In most cases where you pass tips to an employee, you are liable for both employer and employee National Insurance contributions because neither of the 2 conditions are satisfied." A tronc run independently of the employer meets the second condition, and its payments carry income tax only.

How each kind of tip is taxed

Arrangement	Who runs PAYE	National Insurance
Cash tip handed to a worker and kept, with no involvement from the business	No PAYE. The worker tells HMRC	None
Cash tips collected by the owner or a manager and shared out	The employer, through its payroll	Employer and employee
Card and app tips paid through the payroll, with shares set by the business	The employer	Employer and employee
Card tips passed to an independent troncmaster who sets the shares	The troncmaster, through the tronc PAYE scheme	None
Tips paid through an app straight to staff, never passing through the business	No PAYE. The worker tells HMRC	None
Compulsory service charge paid out to staff	The employer	Always due

For cash tips that staff keep, E24 says "Tax will be due on these amounts, but no National Insurance contributions will be due." The worker reports them through self assessment, their personal tax account or HMRC's helpline, and HMRC collects the tax through a change to their tax code.

Who can be the troncmaster

If the employer, a business partner or a company official such as a director runs the tronc, E24 says "they are considered to be making payments as if they were the employer". The payments go through the company payroll and National Insurance is due on them. E24's example is a director of a hotel company chosen by the staff to run the tronc: every payment still goes through the company payroll, and the company is responsible for PAYE.

The troncmaster can be a head waiter, a chef, a member of staff elected by the team, or an outside firm. Whoever it is:

• is personally responsible for operating PAYE on the tronc, and can be held responsible for tax that was not deducted
• works under a PAYE scheme in their own name, which HMRC sets up once the employer has told HMRC who the troncmaster is
• keeps the tronc's PAYE records separate from the employer's. The troncmaster can use the employer's payroll software, with the employer acting as payroll agent, but E24 says the tronc scheme "must be entirely independent of the employer's scheme"

Where a tronc payment does carry National Insurance, the employer works it out and pays it to HMRC (E24 section 8). To do that, the employer needs to know what the tronc pays each worker and when.

What makes the employer the allocator

E24's worked examples show where HMRC draws the line between an independent tronc and one the employer controls.

Arrangements that bring National Insurance back

• The owner devises a points system and requires the troncmaster to use it. HMRC treats the owner as allocating the tips indirectly, and National Insurance is due on everything the tronc pays out (example 11).
• The owner guarantees each worker a minimum amount of tips and tops it up when tips fall short. The top-up is a contractual payment out of the owner's pocket and carries National Insurance. The tips paid up to the minimum carry it too if the owner allocates them (examples 8 and 13).
• A chef's contract promises £200 of wages and £400 a week from tips, and the owner takes the £400 out of the tips before passing the rest to the troncmaster. The £400 carries National Insurance. Anything the troncmaster later decides to pay the chef from the tronc does not (example 9).
• Mandatory service charges are paid out through the tronc. E24 says the employer is then responsible for operating PAYE, and National Insurance is always due on a mandatory service charge paid to staff.

Arrangements that keep the tronc independent

• The staff, or the troncmaster, choose a points system themselves, with no compulsion from the owner (example 11).
• Employment contracts give staff a right to take part in the tronc, with no promised amount (example 12).
• The owners suggest to the troncmaster that new starters should join sooner, and the troncmaster decides. Influencing who takes part is treated differently from deciding who gets how much (example 14).
• A staff committee decides the shares, even though the employer appointed the troncmaster (example 10).

What an independent tronc saves

£6,000 of card tips in a month, paid two ways

Shares set by the business, paid through its payroll

Employer National Insurance at 15% is £900. Employee National Insurance at 8% is £480.

£1,380

Shares set by an independent troncmaster

Income tax is deducted through the tronc PAYE scheme. National Insurance is not due.

£0

Over a year, £6,000 a month of card tips is £72,000. Paid through the payroll with shares set by the business, that carries £10,800 of employer National Insurance and £5,760 of employee National Insurance. Paid through an independent tronc, neither is due. Income tax is due either way, and none of the tips counts towards the minimum wage.

Setting up a tronc

Setting up a tronc

1. RulesWrite down who takes part and how shares are worked out. The staff or the troncmaster adopt them, and the same rules go into the written tipping policy.
2. TroncmasterA member of staff chosen by the team, or an outside payroll or accountancy firm. The owner, a partner or a director cannot do it without the payments counting as the employer's.
3. HMRCThe employer tells HMRC who the troncmaster is. HMRC sets up a PAYE scheme for the tronc in the troncmaster's name.
4. Each pay runThe troncmaster sends a Full Payment Submission on or before payday and pays the tax by the 22nd of the next tax month.
5. Each monthEvery tip reaches staff by the end of the month after the customer paid it.

Where a troncmaster controls the tips and shares them out, the employer must tell HMRC, unless the arrangement started before 6 April 2004 (E24 section 6). HMRC may check that a sharing arrangement exists and that the troncmaster has accepted the role. A change of troncmaster is reported to HMRC too (example 3).

Tipping law gives a tronc a second purpose. Under section 27F of the Employment Rights Act 1996, an employer that arranges for an independent tronc operator to allocate the tips, where it is fair to do so, is treated as having allocated them fairly. The code of practice adds that if the employer later finds the troncmaster acting unfairly, it must act: by instructing the troncmaster to change, replacing them or ending the tronc. The code's glossary says the employer "remains liable for the fairness and transparency of the scheme".

Common mistakes and what HMRC does

• The owner or a director runs the tronc. HMRC treats the payments as the employer's, so employer and employee National Insurance is due on all of them.
• The tronc pays out under rules the owner wrote and imposed. HMRC treats that as indirect allocation.
• Mandatory service charges go into the tronc. The employer must run PAYE on them and National Insurance is always due.
• Tronc payments run through the employer's own PAYE scheme. E24 says employers "cannot use their existing PAYE scheme when setting up a tronc".
• The business promises a minimum and tops it up. The top-up carries National Insurance.
• Tips are held in the tronc past the end of the month after the customer paid, which breaks section 27G of the Employment Rights Act 1996.

E24 section 11 says HMRC reviews employers' records for PAYE, National Insurance and the minimum wage, and that where a business has both an employer scheme and a tronc scheme "it is likely, though not automatic, that records for both schemes will be reviewed at the same time". Where National Insurance should have been paid, the employer pays it. A penalty for an inaccurate return can be added: up to 30% of the extra tax where the business did not take reasonable care, 20% to 70% where the error was deliberate, and 30% to 100% where it was deliberate and concealed. A worker who is not paid tips fairly or on time can also bring a tribunal claim within twelve months, with compensation of up to £5,366.

Records and deadlines

• The tipping record: every qualifying tip and how it was allocated, kept for three years from the date the tip was paid (Employment Rights Act 1996, section 27J).
• PAYE records for the employer's scheme and the tronc scheme, each kept for 3 years from the end of the tax year they relate to.
• The written tronc rules, the troncmaster's acceptance of the role, and HMRC's letters about the tronc PAYE scheme.
• A Full Payment Submission for each tronc pay run, sent on or before payday.
• PAYE paid to HMRC by the 22nd of the next tax month for monthly payers, or by the 22nd after the end of the quarter for quarterly payers. A cheque must arrive by the 19th.
• Tips paid to staff by the end of the month after the month the customer paid.

Tips paid through a tronc do not count towards National Minimum Wage pay. Each worker's pay from the employer has to reach the minimum wage before any tips are added.

How we help

We set the tronc up with HMRC, write the tronc rules and the tipping policy with your team, and run the troncmaster's payroll as a separate PAYE scheme alongside yours. Each month we check that the troncmaster set the shares and that the tips reached staff by the deadline. More on payroll, tips and tronc, and the tipping law guide.