What is a Tronc Scheme in the UK? Understand The Basics

In the UK, tipping is a commonplace practice in industries like hospitality, restaurants, and hairdressing. As a token of appreciation for the hard work, your customers may reward your staff with a tip or service charge. When they do that, your employees deserve a fair share of it. However, distributing tips fairly and managing them tax-efficiently is crucial. This is what a tronc scheme is all about. Often misunderstood, a tronc is a vital payroll mechanism with the purpose of benefiting both employers and employees by ensuring that tips and gratuities are allocated and taxed correctly. Hence, in this guide, we will explain what is a tronc scheme, including how it works, and how businesses can stay compliant with HMRC.

What Is A Tronc Scheme?

According to HMRC:

“A tronc is a special pay arrangement used to distribute tips, gratuities and service charges.”

A tronc scheme is a special and organised payment arrangement that UK businesses use to distribute tips, gratuities, and service charges to employees in a fair way. These payments are made through a tronc, which is essentially a pool of tips. Principally, a troncmaster administers or runs this scheme. They are an individual other than the employer (usually an employee) appointed to oversee the fair and transparent allocation of these funds among eligible staff. Since, in line with HMRC directives, a tronc is not operated by the employer but by the troncmaster, the employer has no control over how the tips are distributed. Consequently, this difference has significant implications for how NICs are applied to employees.

How Does A Tronc Scheme Work?

In a typical Tronc setup:

• Firstly, customers leave tips via card or service charges, which the tronc holds in a common fund.
• Next, these tips are collected centrally by the employer.
• The troncmaster, who may be nominated by staff or management, decides how to distribute the tips.
• Lastly, the funds are then paid to employees through the payroll system.

 

 

Are Tronc Payments Taxed?

A tronc is a tax scheme that distributes pooled client tips and service costs fairly among staff.  Notably, Troncs are becoming more common in this day and age since more people are switching from cash to card payments and digital tips. Nevertheless, it is worth highlighting here that when tips are deposited into a business account, they are processed through payroll, which creates issues for fair distribution. It implies that although tronc payments are meant to add tips to employees’ pay, this subjects the tip amount to taxation and NICs.

However, fortunately, tips, gratuities and service charges paid under the Tronc scheme are exempt from NICs. How so?

In line with HMRC guidelines, any payment made to an employee which is “the payment of a gratuity” or “in respect of a gratuity” is exempt from NICs if:

• The employer does not pay the tronc amount directly or indirectly to the employee, and it does not include or represent cash previously paid to an employer.
• The employer does not allocate it directly or indirectly to the employee.

As a result, if an employer distributes the Tronc funds, income tax and NI are payable. For greater clarity, if a business gives a tip to an employee, the employer is responsible for NICs, as in this scenario, neither of the above-cited conditions is fulfilled. This is where the Tronc system becomes beneficial. On the contrary, if you run a Tronc system where the troncmaster, or an external provider, decides on the allocation of funds, NICs are not payable. However, take note that the income tax is still deducted under PAYE on all tips or income paid to the staff through a tronc. Lastly, the tronc scheme must be registered with HMRC.

Conclusion:

To summarise, knowing what is a Tronc scheme is significant as it offers a fair and efficient way to handle tips and gratuities in sectors where tipping is customary. When this scheme is set up and administered correctly, it can help businesses remain compliant with HMRC regulations while ensuring employees are fairly rewarded. Similarly, for the current tax year, with increasing focus on payroll transparency and efficiency, it is essential to adopt a properly managed tronc scheme is unquestionably important. To this end, proficient and skilled accountants at Payrollservices.accountants can be at your disposal. Whether you are an employer looking to set up a compliant tronc or an employee wanting clarity on your tip entitlements, with our across-the-board and expert support, you can ensure accurate processing, timely reporting, and peace of mind. Therefore, from PAYE to tronc management, we help you streamline your payroll responsibilities, keeping you in harmony with HMRC expectations.

Disclaimer:

Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.