New Code of Practice on workers’ tips - are you ready for 1 October?

The long awaited Employment (Allocation of Tips) Act 2023, (the ‘Tipping Act’), comes fully into force on 1 October 2024. From that date, businesses in England, Scotland and Wales must meet new legal requirements for how they allocate and pay certain tips, gratuities, and service charges (referred to collectively as ‘tips’ below) to their workers. This article looks at how businesses can be compliant with the legislation and what options are available to help with this.

With the introduction of the Tipping Act, any businesses where employees can receive qualifying tips, will need to consider how they are allocated to ensure the business is compliant. The employer has various requirements to comply with depending on how the tips are received. The main priority is ensuring that you know what currently happens within the business, who decides the allocation, do you use agency workers, if you have a tronc in place, is this compliant and do you need to make changes in advance of 1 October 2024?

In addition to this, the tax and social security implications need to be considered. As outlined in our previous articleopens in a new tab, whether tips are subject to income tax and social security deductions depends on how they are distributed to workers. Under the new Act, businesses must fairly and transparently allocate qualifying tips to workers within one month of the end of the month in which they were received (subject only to deductions such as PAYE).

Where an employer arranges for qualifying tips to be allocated by ‘an independent tronc operator’ and no unauthorised deductions are made from this distribution, the new Act confirms that the employer is to be treated as having ensured that these tips are allocated fairly. 

Tips and discretionary service charges which are allocated to workers through a properly operated tronc are subject to PAYE, but no NIC is payable by the employee or employer. This represents a saving compared to tips and service charges which are collected and distributed by the employer, as these will be subject to both PAYE and NIC.

Furthermore, with the introduction of the new Act, implementing an independent tronc scheme, or updating an existing one, can allow employers to comply with their obligation to distribute tips fairly.

However, there is a fine balance between employers being able to meet their legal obligation of ensuring that tips are fairly distributed and paid under a tronc, whilst maintaining the independence from the tronc that is required from a tax perspective to access the NIC savings. 

A tronc is an arrangement under which tips and discretionary service charges are pooled and distributed to workers by an independent tronc operator.

For a valid tronc arrangement to be in place, the operator must be independent from the leadership and ownership of the business - an area where we have seen many tronc arrangements fail over the years. In many businesses, it will be the General Manager of a site or the Head Waiter.

Employers can appoint, replace, or remove the tronc operator, but they cannot support them to allocate tronc funds. If tips and discretionary service charges are held in a business account of the employer, they must be separately identifiable and not available for use by the business.

From a tax perspective, it will be important for any new or existing tronc operator to meet the condition of being independent from the business in order to qualify for the NIC saving. Where this is not the case, as well as an exposure to underpaid NIC, other liabilities such as student loans, apprenticeship levy and pension contributions can arise. One way in which businesses can fall foul of the rules is by inappropriately referring to the tronc arrangement in employment contracts and job adverts. It is therefore important that advice is sought from both a legal and a tax perspective to ensure all requirements are met.

Furthermore, existing tronc arrangements may not comply with the obligations imposed under the new Act and should be thoroughly reviewed. For example:

• Do you currently recover administration and payroll support costs from the amounts distributed? - Tips can be paid under a tronc arrangement via an employer’s payroll, and some businesses will currently be deducting the genuine costs they incur to administer this from the distributions made. Under the new Act, this will no longer be permitted so businesses will need to absorb these costs or consider withdrawing support given to the tronc operator in this regard. If support is withdrawn, could your tronc arrangement continue to operate?
• Have you communicated the potential timing changes of paying tips to your employees? - Some tronc arrangements currently save a proportion of the collected tips and discretionary service charges to be paid out at specific times of the year to best support employees. For example, a larger proportion of tips may be paid out ahead of the Christmas period to support employees with additional costs at this time, or the tronc may save a proportion of the monies collected in a month with high tipping to cover a lower tipping month to give better consistency of pay to employees. Under the new Act, the amounts must be paid out following the end of the month in which the tip or service charge was received. This could result in more variable amounts being paid to employees throughout the year. How will this impact your workforce?

Employers should review any existing or proposed arrangements against the new Act and the Code of Practice once this is available.

Where employers are not compliant with the Act the impact is that the employees can seek a remedy through an employment tribunal. This can result in financial compensation being due to employees and reputational damage to the employer.  

Where the tax and social security treatment is not correctly dealt with, HMRC will seek to resolve this through the employer who will be liable to any underpayments as well as interest and potentially penalties.

Please contact the authors or your usual KPMG in the UK contact if you would like to discuss how to prepare for the changes and implement or update a tronc arrangement to be compliant. 

For further information please contact:

• Sarah Haynes
• Laura Brown