The Employment (Allocation of Tips) Act 2023, also known as the Tipping Act requires hospitality employers to pass all tips, gratuities and service charges on to their staff.
To comply with the law, businesses must have a clear system for managing and distributing tips fairly. One effective way to do this is through a tronc scheme.
In this guide, we explain what a tronc scheme is and how to set one up to ensure tips are managed fairly and in line with the law.
What is a tronc scheme?
A tronc scheme is a formal system for collecting and distributing tips among employees. It ensures compliance while promoting fair allocation across the team. Here’s how it benefits both employers and staff.
For employers:
When your customers leave tips via card payments, the money initially goes into the business account. Simply paying it out through payroll without a formal scheme treats it as regular business income, which is fully taxable.
A tronc scheme provides a compliant way to distribute these funds while removing the need for your business to pay National Insurance on them, offering a tax saving of roughly 15%.
These savings can have a direct impact on your coffee shop’s profit margin, particularly for businesses with high card tip volumes.
For employees:
A tronc scheme makes tips exempt from National Insurance, which can save staff around 10%. For example, £400 in monthly tips could add an extra £40 to take-home pay.
It also recognises the chefs, cleaners and admin staff, so everyone who contributes to the customer experience shares in the benefits. The key to running this smoothly is appointing the right tronc master.
Who is a tronc master?
A tronc master is the person responsible for managing how tips are shared. This individual must be independent from the employer. This role is often filled by a trusted senior staff member or an external individual.
Having an independent tronc master reassures staff that tips are handled fairly and helps ensure compliance with HMRC requirements.
How to set up and run a tronc scheme?
Here’s how you can set up an efficient and compliant tronc scheme:
1. Decide what goes into the tronc
Determine which payments will be included in the tronc such as card tips, cash tips and discretionary service charges. Also, decide which staff roles will be eligible to receive these tips.
2. Ask employees as well
A tronc scheme works best when employees feel involved. Ask for their input on how tips should be shared. This builds trust and helps prevent future disputes.
3. Assign a tronc master
Once appointed, the tronc master is responsible for setting rules for tip distribution, gaining employee agreement, collecting tips and service charges, keeping accurate records and addressing any staff questions or disputes.
Choose someone impartial to manage the process fairly or consider outsourcing the role to a specialist service to avoid internal conflicts.
4. Register a separate PAYE scheme
In addition to your business’s regular PAYE, the tronc master should register a separate PAYE scheme for the tronc with HMRC. This ensures income tax is deducted correctly from tronc payments and keeps the scheme independent from the main payroll.
If a tronc master fails to meet their PAYE obligations, HMRC may require the employer to manage PAYE on future distributions, even if the tronc master continues handling tip distributions.
5. Understand National Insurance contributions
Tips paid through a tronc are generally exempt from National Insurance contributions if:
- The tronc master is allocating funds that were not originally paid to the employer
- The employer does not pass the money directly or indirectly to employees
- The employer does not influence or decide how tips are distributed
6. Put your tipping policy in writing
By law, businesses must have a written tipping policy which clearly outlines:
- The types of payments included in the Tronc
- Which employees are included
- The method of tip distribution
- When payments are made
This ensures transparency and helps staff understand how tips are shared.
7. Integrate the tronc with Payroll
To keep everything seamless, link the tronc scheme with your main payroll processes. Using a dedicated payroll software system or turning to outsourced payroll services makes it easier to process tronc payments, deduct the correct tax and maintain clear records without adding extra admin.
How to distribute tips fairly under the tronc scheme?
The best way to share tips will vary depending on the size and structure of your hospitality business. Here are some effective methods you can adapt to your team:
Base it on actual hours worked
This is one of the most common methods as it reflects the time staff genuinely spend on shift, not just their contracted hours.
Split by department
Larger businesses often divide the tronc pot between teams such as front-of-house, kitchen, and housekeeping, before allocating within each group. This ensures the whole team shares tips equally.
Factor in seniority or length of service
Retaining skilled staff is an ongoing challenge with high staff turnover in the hospitality industry. By weighting tip distributions for seniority or length of service, you not only reward experience but also encourage loyalty and reduce turnover.
Use a points system
For larger or more complex operations, a points-based system allows you to balance multiple factors like role, responsibility, and hours worked while keeping distribution transparent.
How you manage tips says a lot about your values as an employer, especially in a people-driven industry like hospitality. That’s why it’s important to structure your tronc scheme under expert guidance.
At Rise Accounting, our team of specialist hospitality accountants helps businesses like yours set up and manage tronc schemes, payroll and tax compliance by acting as your outsourced finance function.
Book a no-obligation call to see how we can support you.
