The Employment (Allocation of Tips) Act 2023 introduces a new legal framework to ensure fair allocation of tips in the workplace. Under this legislation, employers are obligated to adhere to a Code of Practice that promotes fairness and transparency in distributing tips. In this article, we’ll explore the tax and National Insurance implications related to tips, gratuities, and service charges, along with their impact on the National Minimum Wage (NMW) or National Living Wage (NLW).

Differentiating Tips, Gratuities, and Service Charges

Customers may choose to pay extra in the form of tips, service charges, or gratuities. Tips and gratuities are voluntary payments, for which customers have no obligation to pay. Some restaurants add a service charge to the bill, but if it’s made clear that the customer has no obligation to pay it, it becomes a voluntary service charge. However, if the customer is required to pay the charge, it becomes a mandatory service charge.

Tax and National Insurance Considerations

When a customer gives a tip directly to a worker or leaves it on the table, the worker is responsible for reporting it to HMRC. The tips received are liable for tax, and workers should inform HMRC either through a Self-Assessment tax return or their personal tax account. The associated tax is typically collected by adjusting the employee’s PAYE code. National Insurance contributions do not apply to tips given directly to a worker.

Employer Distribution of Tips

If the employer collects all the tips, whether in cash or through card payments, and distributes them to the employees, the distributed amounts must be processed through the payroll. They should be included in the employees’ gross pay, subject to both tax and National Insurance.

Tronc Arrangements for Tip Sharing

A tronc refers to an arrangement for sharing tips, managed by a troncmaster. The troncmaster is responsible for operating PAYE and National Insurance on the distributed tips. To manage this, a tronc should have its own separate PAYE scheme, independent from the employer’s PAYE scheme.

Tips and the National Minimum Wage (NMW)

Workers are entitled to receive at least the National Living Wage (NLW) or National Minimum Wage (NMW) based on their age category. Amounts received as tips, gratuities, or service charges do not count towards meeting the minimum wage requirement. Employers must ensure that workers receive the NMW or NLW in addition to any tips they earn.

 
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