The hospitality industry has always been built on tips, but not every establishment was as fair with the distribution of these tips as they should be. The Employment (Allocation of Tips) Act 2023 changed this. In 2024 it became law that staff must receive 100 percent of the tips. No deductions (apart from tax) and with a fair and transparent allocation.
The other side of this change, and driven by the rise in cashless tipping, is the fact that employers are now being hit with National Insurance Contributions on these tips as they hit their bank account, before distribution via payroll.
But there is a solution. Trips distributed via a Tronc scheme remove the obligation for both Employers’ and Employees’ NIC on the tips.
Yet many businesses are still losing money every month because their payroll provider or accountant doesn’t understand tronc schemes.
The bottom line? This knowledge gap is costing both you and your staff serious money.
The hidden cost of tronc ignorance
Let’s talk numbers.
If your business receives £20,000 in tips per month and you’re not using a proper tronc scheme, you’re paying an unnecessary 15% in Employers’ National Insurance contributions. That’s £3,000 per month – or £36,0000 per year – going straight to HMRC instead of staying in your business. What could your business do with that sort of reduction in costs?
Your staff are getting hit too. Without a tronc scheme, employees pay 8% National Insurance on their tips. So, for every £100 in tips, £8.00 vanishes into National Insurance payments that could be completely avoided with a properly structured tronc scheme. And these savings can start to stack up. A team member bringing in £5,000 a year in tips would have an extra £400 in their pockets!
Why most payroll providers get it wrong
Tronc schemes have been around since the 1980s, but when tips were given mainly in cash and kept in the ubiquitous ‘tip jar’ for distribution, the tips largely remained outside of the realm of the accounts and payroll. Put simply, troncs were often disregarded as something that wasn’t needed and an over-complication of a system that ‘worked well’.
The double whammy of new legislation from October 2024 and the fact that most tips now end up in business bank accounts, so are visible and need to be distributed via payroll, has created the perfect storm. Enter tronc schemes, which are suddenly coming into their own!
But many payroll services, whether managed payroll providers or accountants, are just not experienced (or even aware) of tronc schemes.
The problem isn’t malicious – it’s that tronc schemes can be complex. If the operators are not aware of these requirements, it should be the responsibility of the payroll providers they outsource to, but most simply lack the specialist knowledge needed to offer this advice.
Here are some of the typical issues we see with inexperienced payroll providers;
The belief that there needs to be a separate PAYE for tronc payments
Although there can be, this is not a requirement as long as the tronc payment is separated on the payslip, and treated according to the rules for NI, troncs can be paid out through your main PAYE scheme
Not understanding who can be the Troncmaster
This is the most common error on tronc schemes, and can threaten its validity. The Troncmaster must be independent from the hiring responsibility within the business, so that rules out some of the ‘obvious’ choices, including business owners, directors, HR, and maybe managers.
Having an independent third-party Troncmaster is often the best solution, but then they are responsible for the tronc scheme, so they do need to know their stuff. Again, we are back to a lack of understanding and confidence with the payroll provider or accountant being able to step into this role.
Understanding how the new Allocation of Tips legislation impacts tronc schemes
Although tronc schemes are not a stipulation of the new legislation, they do go a long way to demonstrate the ‘fairness’ and ‘transparency’ required. But, it also works the other way, with the legislation curtailing some of the practices that were allowable through tronc schemes, such as holding back some of the
funds to smooth seasonality, or pooling the tips across multiple sites.
The real-world impact
We’ve seen businesses discover they’ve been overpaying National Insurance for years simply because their accountant didn’t understand tronc schemes.
Employers fall foul of the National Minimum Wage due to not understanding the role tips play in pay.
Businesses lose customer confidence (and tip amounts) because they switched to service charges added to the bill automatically, without a clear explanation of what happens to those tips.
The Ascend difference
At Ascend Payroll, we don’t just handle tronc schemes – we specialise in them. Our managed tronc service can advise and manage your tips, handling the complexities so you don’t have to.
- We can act as your independent Troncmaster through our sister company Tips and Troncs
- Help you set up a new tronc scheme or review your existing one
- Help you devise a fair distribution policy
- Calculate your allocation to each staff member per pay period
If you handle your payroll internally or use an external service, we can then pass this information to them for distribution via payroll.
OR
We can also handle the whole payroll and tronc process in one simple managed service.
The choice is yours.
Time to stop losing money
Your payroll deserves transparency, compliance, and security. If your current provider can’t explain exactly how a tronc scheme works, how the National Insurance savings are calculated, or what your compliance obligations are under the new legislation, you’re probably missing out on substantial NI savings..
Don’t let another month go by with money unnecessarily flowing to HMRC instead of staying in your business and your staff’s pockets. Contact us today and let us show you exactly how much your tronc ignorance is costing you.
P.S. For more up-to-date information on tronc schemes and tipping, follow the Tips and Troncs LinkedIn page, where we will be posting our latest insights and education pieces
