How to set up and manage a tronc scheme in 2024

A tronc is an organised payment arrangement to distribute the tips, gratuities, and service charges that customers give to your employees in a fair and transparent way.

The person that runs a tronc is known as a troncmaster. They pay employees tips through a separate payroll run and PAYE scheme and report the details to HMRC.

When you run a tronc scheme in this way, tip payments are not liable for employer or employee National Insurance (NI) contributions.

New legislation is being introduced in October 2024 through the Employment (Allocation of Tips) Act, which means employers need to understand how tronc systems work and the benefits of using one.

What is a tronc scheme?

The word ‘tronc’ comes from a 1920s French phrase: “tronc des pauvres”, which refers to the collection of boxes for donations to the poor.

A tronc scheme is a mechanism used to distribute all tips to workers fairly, transparently, compliantly, and without the influence of the workers’ employer.

A tronc scheme will include all tips made on card payments and service charges added to the bill, as long as the customer knows the added payment is discretionary. A tronc can also include cash tips if these are pooled.

Direct tipping cannot be included in a tronc scheme, and is subject to income tax and NI – therefore a tronc will not include tips (normally cash) given directly to a specific worker.

How do tronc systems work?

A tronc is a method of collecting tips from customers and holding the tip receipts in a common fund. The funds are then distributed by the troncmaster.

If an employer decides how tronc funds are distributed, income tax and NI is payable. However, if you operate a tronc system where the troncmaster, or an external provider, decides how the funds are allocated, NICs are not payable.

What is a troncmaster?

A tronc scheme is controlled by a troncmaster, who is appointed by the business. They can be appointed from within the business – for instance, a head waiter – or externally. External appointments can be suitable as they will be independent and run the scheme without favouring specific employees.

A troncmaster must be independent of the company’s recruitment team, and it is crucial to appoint a suitable person as troncmaster. HMRC could investigate and enforce repayment of NI on tip income if either:

• The troncmaster is found not to be independent of the company’s recruitment team
• The troncmaster is not qualified or trained to do the job and makes mistakes

The troncmaster’s responsibility is to ensure tips are evenly distributed without bias. They must register with HMRC and report tronc transactions via payroll. This means they must understand the company’s PAYE system and how to apply tronc transactions to it.

The different tronc scheme structures

How a tronc scheme is structured depends on many things, including the job roles involved, the nature of the business, and how tip payments are made.

The troncmaster decides the structure of the scheme and how it is implemented.

Tronc scheme options include:

• Equal distribution – Tronc receipts are divided equally between all employees, regardless of their role, responsibility, performance, or hours worked. It ensures the whole team shares tips equally.
• A points-based system – The troncmaster has some discretion on how to reward employees. They can distribute based on job role, customer feedback, or hours worked.
• A performance-based system – The tronc is split based on individual performance, linked to sales targets or customer feedback. This can incentivise employees to give excellent service and reward employees who excel.
• A tiered system – The tronc is split into separate sections based on the job role, how much the worker directly helped customers, and the level of employee responsibility. It means employees who help customers more receive bigger rewards.

Whatever method is selected, it must be communicated to all relevant staff, operated using clear rules, and fair to all employees, including temporary or agency staff.

Read more: should kitchen staff get tips?

How to set up and manage a tronc system

Firstly, decide whether the troncmaster should be an employee or a specialist external provider.

If you choose an external provider, they will set up the tronc system. It must be managed in a fair and transparent way and be HMRC compliant to qualify for exemption from NI contributions.

If you choose to run your own tronc, you must select a troncmaster to manage it. Using an existing employee will probably be cheaper, but troncmaster is a complex role that requires knowledge and skills to perform effectively, so they will need support, training, and potentially a salary increase.

Consult with employees about creating a fair tips policy. Front of house employees understand how tipping works within the context of your business, so find out from them what issues are important regarding tip allocation and policies. Utilise their input in designing a policy. Having a good policy is vital, because if staff think it’s unfair, it will have a negative impact on their motivation and potentially the customer service they provide.

Your policy should include rules for collecting, allocating, and reporting tips, detail any fees or deductions, and be sent to all employees.

Under the Employment (Allocation of Tips) Act – also known as the Tipping Act – employees have the right to receive information about the total tips an employer receives and how they are allocated. Records should be maintained for three years, so you should check whether your existing payroll software can be used for this reporting function. Many payroll products include a tronc calculation feature to help businesses record and distribute tips as the Act requires.

Employers must ensure their tronc system complies with current and impending legislation, such as the Employment (Allocation of Tips) Act.

The benefits of a tronc pay system

The benefits of using a compliant tronc system are:

• Staff benefit from an impartial system, free from employer influence over tip allocations. They can help shape their employer’s tip allocation policy.
• A tronc system provides more transparency on tips, which builds trust between employees and employers.
• When employees receive all the tips, they benefit from providing excellent customer service, and so will be motivated to continue to do so.
• A fair tipping system promotes staff retention, which also benefits the business.
• Using a tronc system provides efficiency benefits, as many administration tasks linked to collecting and distributing tips can be automated in such a scheme.
• A tronc system gives more visibility on tip income and allocation, improving financial reporting and management.
• Both the staff and employer benefit from not paying NI on tips held in a tronc system. Employees are liable for an 8% NI charge on tips received outside of a tronc system and employers would pay 13.8%.This can save employers large sums. If a chain of restaurants collectively receives £50,000 a month in tips, a 13.8% NI charge would equal £6,900 a month in employers NI paid to HMRC.

An example of the tax benefits of a tronc system

Below, we’ll examine how tax contributions apply to a service charge, with and without a tronc system in place.

Without tronc

An employer receives £100 as a service charge and allocates it to qualifying employees, all of whom are basic rate taxpayers. Tax and NI are applied like so:

• Altogether, the employees pay collective income tax at 20% = £20
• The employees also pay collective NI of 8% = £8
• The employer pays employers NI at 13.8% = £13.80

From the £100 service charge, HMRC receives £20 + £8 + £13.80 = £41.80, while the employees receive £100 – £20 – £8 = £72 between them.

With tronc

With a tronc system in place, there is no NI liability, so using the same example:

• On £100, the employees pay collective income tax of £20, but no NI
• The employer pays no NI

Therefore, HMRC receives £20 and the employees receive £80 of the £100 service charge between them.

What has changed in 2024?

Under the Employment (Allocation of Tips) Act 2023, which comes into effect in October 2024, the main change is that 100% of qualifying tips, less statutory deductions, must be distributed fairly to staff no later than the end of the month after the month in which the tip was earned.

Previously, businesses could decide what proportion of the service charges and tips paid by customers was allocated to staff. This gave businesses discretion to use some tip income for other purposes, such as boosting profit margins or topping up wages to reach national minimum wage level.

Under the new law, employees have the right to request access to employers’ tips records, and they can take their employer to an employment tribunal if they believe tip income that they are due has been withheld. Businesses can be fined and prosecuted if they don’t pay out tips fairly and compliantly, so it’s important to ensure your tronc system is run effectively.

Employers must now publish a tips policy and communicate it to employees and customers.

Conclusion

The introduction of the Employment (Allocation of Tips) Act in October 2024 compels employers to collect and allocate all tip income to staff, fairly and transparently. A tronc scheme can help employers meet the requirements of the act.

Within a tronc scheme, tip payments are not liable to NI, which saves employees and employers money.

There are clear and strict guidelines on how to set up and manage a tronc scheme using an internal or external troncmaster who must be independent of employer influence.

Visit GOV.UK to find out more about how to set up and manage a tronc system.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.