Tips are always taxable income, but who collects the tax and whether National Insurance is due depends on how the tip is paid and who decides how it is shared. If the employer pays out or allocates tips, they go through payroll with tax and National Insurance. If an independent troncmaster decides the split, PAYE still applies but National Insurance does not. Separately, the Employment (Allocation of Tips) Act 2023 requires employers to pass on all qualifying tips without deductions and share them fairly.

How are tips taxed?

HMRC’s guide E24 and GOV.UK’s tips at work page set out three routes:

  • Tips kept by the employee. Cash handed to a waiter, or tips paid through an app straight to the worker, with no employer involvement, are outside PAYE. The employee reports them through Self Assessment, their personal tax account or by phone, and HMRC usually collects the tax through an adjustment to their PAYE tax code. No National Insurance is due.
  • Tips paid out by the employer. Card tips received into the business account and passed on, or cash collected by a manager and shared out, must go through the employer’s payroll with PAYE.
  • Tips paid through a tronc. The troncmaster operates PAYE on the payments under a separate PAYE scheme.

The legal basis for PAYE on tronc arrangements is regulation 100 of the Income Tax (Pay As You Earn) Regulations 2003. E24 stresses that responsibility for PAYE stays with the employer even if the employer delegates the job to a trusted employee.

When is National Insurance due on tips?

National Insurance turns on two conditions in paragraph 5 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001. A payment of or in respect of a gratuity is disregarded if either:

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

Allocation means deciding who gets what. E24 says that where an employer passes tips to staff it is normally liable to both employer and employee contributions, because neither condition is met. Card tips fail the first condition because the customer paid the employer, so the second condition decides the outcome.

Three situations always attract National Insurance:

  • a mandatory service charge paid out to staff, however it is shared
  • payments the employer is contractually obliged to make, such as a guaranteed minimum or a top up when tips fall short
  • tips allocated by the employer indirectly, for example by requiring the troncmaster to use a points system the employer designed (E24 example 11)

Giving staff a contractual right to participate in the tronc does not by itself create liability, as long as there is no right to a specified amount and the employer does not allocate (example 12). An employer can also suggest that tronc membership be widened without allocating, provided the troncmaster still decides who gets what (example 14).

What is a tronc and what does the troncmaster do?

A tronc is a separate pay arrangement for distributing tips, gratuities and service charges, run by a troncmaster, who is someone other than the employer. GOV.UK’s tronc guidance summarises the position:

Who decides how the money is divided PAYE tax National Insurance
The employer Employer operates PAYE Due, employer accounts for it
The troncmaster Troncmaster operates PAYE Not due
Someone else not acting for the employer Troncmaster operates PAYE Not due

The employer must tell HMRC who the troncmaster is so that a tronc PAYE scheme can be set up in the troncmaster’s name, unless the arrangement existed before 6 April 2004. The troncmaster is personally responsible for operating that scheme and can be held liable for failing to deduct tax. The tronc scheme must be run independently of the employer’s own PAYE scheme, although the troncmaster may use the employer’s payroll software with separate records.

If the employer, a business partner or a company director acts as troncmaster, the payments are treated as made by the employer and go through the employer’s payroll. Where tronc payments do attract National Insurance, the employer, not the troncmaster, calculates and pays it.

What does the Employment (Allocation of Tips) Act 2023 require?

The Act inserted new sections into the Employment Rights Act 1996 and took effect on 1 October 2024, with a statutory code of practice issued under section 27P. It does not change the tax or National Insurance treatment, but it does govern how qualifying tips are handled. Qualifying tips are those received by the employer or subject to its control or significant influence, whatever the payment method. Cash kept by a worker with no employer involvement, and app tips paid direct to staff, are outside the Act.

  • All qualifying tips must be passed to workers without deductions and allocated fairly between workers at each place of business (section 27D), including agency workers (section 27H).
  • Tips must be paid out by the end of the month after the month in which the customer paid them (section 27G). A tip left on 23 June must be paid by 31 July.
  • The employer needs a written tipping policy available to all workers, unless tips are received only occasionally and exceptionally (section 27I).
  • A record of tips received and their allocation must be kept for three years. A worker can make a written request to see it, once every three months (section 27J).
  • Using an independent tronc operator is permitted (section 27F), but the employer must act if it learns the tronc is operating unfairly.

Workers can bring a claim at an employment tribunal, which can order the employer to revise an allocation or pay compensation.

What is changing under the Employment Rights Act 2025?

Section 14 of the Employment Rights Act 2025 amends section 27I so that employers must consult workers or their representatives before producing the first written tipping policy, review the policy at least once every three years, consult at each review and share an anonymised summary of the views expressed. Legislation.gov.uk shows section 14 was not in force at Royal Assent. The government has published a draft revised code and says that for now employers should continue to follow the existing code.

How do service charges, VAT and the minimum wage fit in?

A service charge is added to the bill before the customer sees it. If it is clearly optional it is treated like a tip. If it is compulsory, it is not a tip at all: paid out to staff, it is pay and National Insurance is always due. For VAT, E24 says tips freely given are outside the scope of VAT and optional service charges are too, but a compulsory restaurant service charge is part of the consideration for the meal and standard rated.

Tips, gratuities, service charges and cover charges do not count towards National Minimum Wage pay for pay reference periods starting on or after 1 October 2009, even when paid through payroll.

How does the National Insurance saving work in practice?

Illustration only. A restaurant receives £2,000 of card tips in a month. In version one, the manager splits them using a points table the owner set. That is allocation by the employer, so the tips go through the restaurant’s payroll with PAYE and both employee and employer National Insurance. With all staff above the thresholds, employer contributions at the 2026 to 2027 rate of 15% are £300.

In version two, staff elect a head waiter as troncmaster, the restaurant notifies HMRC, a tronc PAYE scheme is set up and the troncmaster decides the split without direction. PAYE is still deducted, but no National Insurance is due. If the owner later tells the troncmaster how to allocate, version two collapses back into version one.

What mistakes cause problems in an HMRC review?

  • A director or owner acting as troncmaster while the tips are treated as free of National Insurance.
  • Guaranteeing staff a minimum from tips, which makes the guaranteed element contractual pay.
  • Calling a compulsory charge a tip.
  • Not telling HMRC who the troncmaster is, or running tronc payments through the main PAYE scheme.
  • Counting tips towards minimum wage pay.
  • Paying tips out later than the month after receipt, or keeping no tipping record.

E24 says that where an employer has both its own PAYE scheme and a tronc scheme, HMRC is likely to review the records for both at the same time. See our guides to HMRC employer compliance checks and tax investigation insurance for hospitality.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.