If you want to tip restaurant staff, the most efficient way to do it is simply to give them some real money, says TW Ed.
Employers Withholding Tips
There has been some publicity in the press about employers taking a cut of their employees’ tips – ostensibly to cover transaction charges, breakages, etc. It always surprises me that employers want to get involved in tips, because of the NIC implications and costs of doing so.
I thought it might be helpful to set out some of the key points in relation to tips. The rules for tips can be quite heavy going so this is a brisk jog, leaving out some of the finer detail.
- If the employee is given a tip and keeps it (this includes tips simply left on tables) then there is no National Insurance to pay, which is potentially quite a significant saving for the employee. The employee is supposed to account for his or her own tax on such receipts – PAYE is not applicable, so there is no obligation to account for tax before the tips are appropriated.
- If employees run a pooled tips jar (or “tronc”) and tips are divided out amongst the staff, then PAYE should be applied. However, so long as the employer is not both:
o involved in devising or running the system of allocating the payments to employees and
o basically, is not handling the tips themselves, then again, no NICs are due.
- If the employer is involved with handling the tips and allocation to employees, etc., then NICs will be due. This will cost the employees and the employer – 13.8% in the employer’s case. It would seem to be in the employer’s best interest to steer well clear of tips, and to leave it to the employees to deal with it themselves.
- Mandatory service charges will not be considered a “gratuity” and cannot therefore be NIC-free, (if paid on to staff), or indeed VAT-free. It would seem generally advantageous, therefore, for a restaurant to ensure that service charges are genuinely optional – even if they are recommended or suggested by inclusion in the bill. It might be indicative of the quality of service one might expect, if a restaurateur were to insist on a service charge. (From a VAT perspective alone, it suggests that more than 1in 6 tables would refuse a service charge, if given a choice. Run, while you still can. I have written separately about the VAT issues here.)
Troncs are, apparently, trunks, or chests – in "ye olden times", it was not so much a tips jar as a tips tronc. Hence the “Troncmaster” (-mistress?) is in charge of divvying out those tips that are pooled. On reflection, finding out that a Troncmaster was not some deceptively pedestrian superhero of the tax world was the disappointment that shaped my early years in tax. I am not sure I ever truly recovered. The role of “mild-mannered janitor” had already been taken.
The rules in different establishments can vary quite a bit. For example, while the simplest scenario is that whoever receives a tip can keep it, it is often the case that all tips are shared out so that, for example. kitchen staff can benefit as well. The method of dividing up the tips can involve seniority, time served, hours worked, etc., etc.
If you give a tip to (say) a restaurant employee, or simply leave cash on the table for the table-waiting staff to pick up, then the individual who takes that tip for himself is still liable for Income Tax thereon but that is basically it: no National Insurance is due because it doesn’t count as “earnings” for NICs purposes. (The money neither belongs nor is under the influence of the "secondary contributor" - the employer).
If tips are taken by individual staff on an ad hoc basis, then it is down to that employee to notify HMRC of that part of his or her income, and to pay tax on it. While such tips may not count as earnings for NICs purposes, ITEPA 2003 s 62 (2)(b) captures “gratuities” obtained by the employee, for Income Tax purposes. The employee is supposed to deal directly with HMRC, so that he or she can pay Income Tax thereon.
If the agreed arrangement is instead that tips should be pooled and then divided out, then there needs to be a Troncmaster (preferably with superhero uniform; cape optional) to operate PAYE (for tax only) on the tronc.
Provided that the employer is not involved with handling the tips and the operation of the tronc, then there is still no NIC, even though PAYE tax will now be due. The Troncmaster is responsible for operating PAYE tax on the tips and for accounting for the tax due to HMRC. Sometimes, the tronc PAYE regime will piggy-back on the employer’s main scheme (although they strictly remain two separate schemes). In other places, the tronc PAYE scheme may be administered entirely separately.
If the employer takes money on behalf of gratuities, which is largely unavoidable where patrons pay tips by credit card – then NICs are due if the employer also deems how tips are divided amongst employees. This is why you should pay tips in cash: it has the greatest likelihood of going directly to the intended person, and that employee has the best chance of avoiding Employees’ NIC on the tips.
It is my understanding that, where the employer agrees to prepare the PAYE returns based on instructions from the Troncmaster, (i.e., the employer has no involvement in the decisions about who gets what and is simply accounting for and reporting the PAYE thereon) then that does not count as the employer “allocating” the monies to staff, so the employer's merely running the PAYE/reporting aspect of the payroll should not ‘nix’ NIC-free tips.
The Rise of the Troncmaster…
Where the employer acts as Troncmaster, then NICs will generally be due, (since this will almost certainly involve the employer's holding the funds and allocating payments) which will cost potentially everyone – including the employer – more money. It is therefore better for an ordinary employee to take on the role of Troncmaster. The role is not to be taken lightly, as being Troncmaster means being responsible for the Tronc PAYE scheme, and the tax therein, although (as I understand things) it is permissible to delegate the calculation and reporting of PAYE to the employer. It should therefore be possible to be a Troncmaster without having to be a payroll or PAYE expert. However, the role is perhaps best undertaken by a relatively senior employee, such as the head waiter/waitress, on the basis that he or she will have the relevant experience and is likely to be longer in the post.
Many employers do not want to get involved with tips, or running a tronc, perhaps because they feel it is best left to employees to decide how tips should be dealt with, central tronc or otherwise. It is almost certainly more tax efficient (strictly, NIC-efficient) for employers to leave well alone, and this benefits both employee and employer. Mandatory service charges are likewise problematic both in terms of NICs and even VAT, because they will not 'count' as gratuities.
Of course, earnings from the employment have to exceed the threshold for secondary contributions (currently £156 per week) in order for an employer liability to arise; in some cases, it may be that a high proportion of casual staff do not exceed the limit, so the employer is not too worried about the knock-on Employer’s NIC cost. My own experience has been with family-owned restaurants, where a good proportion of the staff are ‘regulars’, so that Employers’ NIC is very much in point.
While some employer involvement may be unavoidable if the tips are paid by card as a supplement to the cost of the meal, etc., it must surely not be beyond the wit of most to ensure that employer involvement is limited only to transferring those funds to the Troncmaster – provided the employer does not also have a hand in the allocation of those receipts to employees, then they may remain NIC-free.
But to avoid doubt, it seems to me that cash must be the preferred option for all concerned: it is most likely to end up (mostly) in the hands of the people you wanted to thank.