Tips and gratuities are interchangeable terms to describe an unwarranted and unprompted payment made to either the employer or an employee by the customer above and beyond the basic charge. Payment may be made to an employer as part of a cheque or credit/debit card payment. Payment may be made to an employee in cash as part of a donation to a staff tips box or handed as a cash payment directly to an employee.
These payments are taxable and both the employee and employer can save on NICs contributions if such payments are paid outside of payroll and through a Tronc scheme.
This is an amount added to a customer’s bill before it is presented to them. If it is explicitly stated to the customer that there is no obligation to pay the service charge then this is known as a voluntary service charge. Similarly, if a discretionary service charge is presented to a customer on an ‘open’ debit/credit keypad where the customer chooses what service charge to pay this would count as a voluntary service charge.
Instances of voluntary service charges would attract the same tax and NICs treatment as tips and gratuities as above.
On the other hand, where an employer imposes a mandatory service charge and subsequent payments are made to employees from this charge, they must be treated differently. Such payments can still be made through a Tronc scheme but will attract both tax and NICs liability.
A tronc scheme is a special pay arrangement used to distribute tips, gratuities and service charges. Such a scheme must have a separate PAYE scheme independent of the employer’s main payroll PAYE scheme and must be administered by an independent Troncmaster.
This is a person, other than the employer, responsible for administering the Tronc scheme to share tips amongst employees.