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Tips, gratuities and service charges

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Summary

How to process tips, gratuities and service charges in Sage Payroll.

Description

To process these payments correctly, you need to identify the nature and arrangements under which employees received them.

The following sections explain the methods of receiving tips, gratuities, service charges and troncs and whether they attract NI and PAYE.

If you're unsure of your responsibilities for PAYE or NI in this situation, check with HMRC before processing these payments. You can contact the HMRC Employer Helpline on 0300 200 3200.

 CAUTION: From 1 October 2024, it's unlawful for businesses to hold back service charges from their employees. Employers must pass on tips to workers without any deductions. Find out more in the Department for Business and Trade's Code of Practice on Fair and Transparent Distribution of Tips.

Resolution

Tips and gratuities

These are normally payments offered by a customer to employees. If the employee receives cash tips directly from the customer for them to keep, there's no NI due.

Tax is normally due on these amounts, but it's the employee's responsibility to declare them. These payments don't need to go through your payroll. PAYE and NI are due on any payments given to the employer to share among employees.

▼Tips left on the table
Situation What to pay

Given directly to the employee.
No NI is due. Employee declares tips income through self assessment.
Polled by troncmaster and distributed to staff.
 No NI is due but PAYE is processed through payroll
The employer decides how the tips are shared.
 NI and PAYE are due. Process through payroll.
▼Tips paid via card
Situation What to pay
Pooled by troncmaster and distributed to staff
No NI is due, but PAYE is processed through payroll.
The employer decides how the tips are shared.
NI and PAYE are due. Process through payroll.

 

Service charges

This is an amount added to a customer's bill before they receive it. This service charge can be voluntary or mandatory. If you operate a tronc system, refer to the Tronc section below.

▼Voluntary

A service charge is voluntary if the customer knows they don't have to pay the stated amount. If the employer distributes or decides how to distribute the money to the employees, NI is due on these amounts. PAYE is due on these amounts, but how employees pay PAYE depends on how they receive the money. If the employer pays this, include this amount in their gross pay and deduct PAYE and NI.

For help with setting up pay elements that aren't subject to NI, use our set-up pre and post-tax and NI pay elements guide.

 CAUTION: From 1 October 2024, it's unlawful for businesses to hold back service charges from their employees. Employers must pass on tips to workers without any deductions. Find out more in the Department for Business and Trade's Code of Practice on Fair and Transparent Distribution of Tips. 

▼Mandatory

A service charge is mandatory if the customer is aware they must pay the service amount on the bill. When paying this money to the employees, PAYE and NI is always due on these amounts. This is regardless of whether payment is direct to the employee, by the employer or through a tronc.

Tronc

A tronc is a separate organised pay arrangement sometimes used to distribute tips, gratuities and service charges.

If your employees get payments through a tronc the person who runs the tronc - called a troncmaster - must run a payroll and report the information to HMRC.

You must tell HMRC who the troncmaster is so that they can set up a PAYE scheme for the tronc.

What to pay

If you have to pay National Insurance contributions (NICs) - the table below tells you when you do - you’ll need to find out from the troncmaster what’s being paid and when, so that you can add it to your employee’s other pay.

▼Situation
How the money is divided What to pay
You decide how the tronc money is dived
You pay PAYE tax and NI
The troncmaster decides how the money is divided.
Troncmaster pays PAYE tax and no NI is due
Someone else, who's not acting for you, decides how the payments are distributed.
 Troncmaster pays PAYE tax and no NI is due