The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024, with the statutory code of practice forming part of the legal framework. By 2026, the industry has settled into the new compliance reality: tips must be passed to workers fairly and in full, with no employer deductions beyond statutory ones. Tronc schemes remain the tax-efficient vehicle of choice for distribution. Here is how we set them up.
The tax case for tronc
A tronc is an arrangement under which tips, gratuities, and service charges are distributed by a troncmaster independent of the employer. When operated correctly:
- Income tax is collected via PAYE under a separate tronc PAYE scheme.
- National Insurance Contributions are not due (neither employer nor employee NIC) provided the employer plays no part in deciding allocation.
- The employer saves 15% Class 1 secondary NIC on tip income.
- Workers retain more net pay than if tips were processed through normal payroll.
A restaurant with GBP 200,000 of annual service charge can save GBP 30,000 of employer NIC through a properly run tronc.
The NIC test
To qualify for NIC exemption, two conditions must be met:
- The tips must not be paid directly or indirectly by the employer to the employee. Cash tips left on the table and pooled by staff outside the employer's control are fine. Service charges added to bills and processed through the employer's till are tax-troncable only if the employer takes no role in allocation.
- The allocation must not be determined by the employer.
Who can be the troncmaster
The troncmaster must be independent of the employer. Common choices:
- A senior member of staff (e.g. a head waiter or floor manager) elected or appointed by colleagues.
- An external third-party troncmaster providing the service for a fee.
HMRC will challenge tronc arrangements where the troncmaster is the owner, a director, or someone clearly directed by the employer.
The Allocation of Tips Act 2023
The Act imposes legal duties separate from tax. From October 2024:
- Employers must allocate qualifying tips to workers fairly and pass them on in full.
- Allocation must follow the statutory code of practice (factors such as type of role, hours worked, performance, length of service).
- Workers can request a written tipping record covering the previous three years.
- Employers must have a written tipping policy and make it available to staff.
- Workers can bring claims in employment tribunal for breach.
The Act applies whether or not a tronc is used. Tronc remains an allocation mechanism; the legal duty to pay fairly sits on the employer regardless.
Card tips and digital service charges
Most restaurants now operate cashless. Card tips processed through the till are clearly under the employer's control unless deliberately routed to an independent tronc account. We set up tronc bank accounts in the troncmaster's name, with the employer transferring tip income on a daily or weekly basis without retaining a discretionary balance.
Recovering historic NIC overpayment
We have helped restaurant groups recover NIC paid on service charges in earlier years where the arrangement should have qualified as a tronc. The recovery window is generally six years for employer NIC, and HMRC requires evidence that the conditions were met in substance. This is worth reviewing for any operator processing tips through payroll today.
VAT on service charges
Voluntary service charges are outside the scope of VAT. Mandatory service charges (where the customer must pay them) are part of the consideration for the supply and standard-rated. Most hospitality operators have moved to discretionary charges to keep them outside VAT and within the tronc framework.
How PushDigits sets up tronc
For new clients we typically:
- Review the existing tip and service charge flow.
- Design an allocation policy compliant with the statutory code.
- Appoint or train a troncmaster.
- Open a tronc bank account and tronc PAYE scheme.
- Configure point-of-sale and till systems to route service charges correctly.
- Run quarterly compliance checks.
Our payroll service operates tronc PAYE schemes for over 40 hospitality clients. Business advisory covers the broader cost-of-employment work. Book a hospitality review or visit our hospitality sector page.