I was reviewing the way in which the calculation of payroll will work for the new Apprenticeship Levy due to be introduced in April 2017 and in principle it’s every payment that is taken into account for Class 1 NIC.

So this could, in some circumstances, include tips. The hospitality sector is by definition one in which cash tips are common, but it’s by no means the only area, as tipping is quite usual in a number of personal service occupations – hairdressers and beauticians, taxi-drivers and gardeners to name but three.

Do you and your employees really understand the taxation implications?  PAYE and NI may apply to tips and gratuities – it depends on whether the customers pay voluntarily or through a compulsory service charge, how it is distributed and who decides on the distribution.

If tips are collected through a compulsory service charge then you must calculate PAYE and NI on the amount each employee receives, whether they are paid direct or receive it via a tronc system (see below).

If your employees receive voluntary (discretionary) tips direct from the customer, and keep them, then you do not need to do anything about PAYE or NI. But the employee is under a duty to declare the tips to HMRC and pay tax on them!

If employees do not keep their own tips (even if these are paid by customers voluntarily) then it depends who decides how these are to be distributed. If it’s you, then you must calculate and deduct both PAYE and NIC for the amount each employee receives. If someone else decides (such as a troncmaster) then your deduct PAYE but there’s no NI


This is an arrangement for pooling and distributing tips (but not compulsory service charges). The person who runs it is known as a troncmaster, and a tronc has its own rules and its own PAYE reference.

You must tell HMRC who the troncmaster is (even if it’s you) and it is the troncmaster who has the responsibility for calculating and deducting PAYE . If it is you (the employer) who decides how the money in the tronc is allocated, then NI is payable and you are responsible for calculating, deducting and paying this. If however a third party decides, such as a troncmaster who is not the employer, then no NI is payable.  The allocation does not have to be decided each time the tronc is distributed – it’s sufficient if a decision is made which allocates according to specific criteria e.g. role, seniority, length of service etc.  What matters is who does the deciding!

And by the way  –  there’s no mystery about the term ‘tronc’. It’s simply the French for ‘trunk’ or ‘box’


If you’re self-employed in an industry where it is common to receive gratuities, then it counts as part of the profits of your self-employment and you are required to declare it. You’ll pay income tax and NI on these via the Self Assessment system. And actually any  sum you receive by virtue of your occupation (even if it’s a tip given to you personally) technically counts as a receipt of your business!

On the other hand, as a self-employed individual, you’ll be able to claim expenses that are allowable against your earnings to a greater extent than is usually available to employees – but that’s a whole new topic!