Tips, service charge and tronc accounting have become one of the most important compliance areas for restaurants and cafes since the Employment (Allocation of Tips) Act 2023 came into force. If your business collects card tips, cash tips or adds a service charge to the bill, you now have legal duties around how that money is passed on and shared, on top of the usual questions about tax and National Insurance. Getting tronc accounting wrong can mean underpaid staff, an HMRC enquiry, or both.
This guide explains what a tronc scheme is, how the new tipping law affects restaurants and cafes, and how correctly structured tronc accounting can genuinely reduce your National Insurance costs while keeping you compliant. For a wider look at restaurant accounting, see our complete guide to accountants for restaurants and hospitality businesses or our restaurant accountants in Uxbridge guide.
What This Guide Covers
- What a tronc is and why restaurants and cafes use one
- What changed under the Employment (Allocation of Tips) Act 2023
- The difference between tips, gratuities and service charge
- How tronc accounting can reduce National Insurance costs
- Setting up a tronc scheme with a troncmaster and PAYE reference
- Fair allocation of tips under the new law
- Cash tips, card tips and service charge accounting treatment
- Common tronc and tips accounting mistakes restaurants and cafes make
What Is a Tronc and Why Do Restaurants and Cafes Use One
A tronc is a special pay arrangement used across the hospitality sector to collect and share out tips, gratuities and service charge among staff, separately from normal wages. Instead of the employer deciding how tips are split and paying them through the ordinary payroll, a tronc is usually run by a troncmaster, who can be a staff member or an external specialist, and who decides how the pooled tips are allocated.
Restaurants and cafes use troncs for two main reasons. First, a well run tronc gives staff a transparent and fair method for sharing tips, which matters even more now that fairness is a legal requirement rather than just good practice. Second, when a tronc is genuinely independent of the employer, tips distributed through it can be exempt from employer and employee National Insurance, which is not the case when an employer simply adds tips to wages and pays them through payroll in the normal way.
The Employment (Allocation of Tips) Act 2023: What Changed for Restaurants and Cafes
The Employment (Allocation of Tips) Act 2023 introduced a legal duty for employers to pass on all qualifying tips, gratuities and service charge to workers without deductions, other than in very limited circumstances such as tax already deducted through PAYE. It also requires employers to allocate tips fairly between workers at a place of business, and to do so promptly, generally by the end of the month following the month the tip was paid.
Employers that collect tips on more than an occasional basis must have a written policy on how tips are dealt with, and must keep records of how tips have been allocated for a set period, since workers have the right to request this information. For restaurants and cafes that were previously managing tips informally, this means tronc accounting needs to be properly documented rather than handled on a rough and ready basis.
Tips, Gratuities and Service Charge: Understanding the Difference
These terms are often used interchangeably by restaurant and cafe owners, but they matter for both the law and the accounting treatment. A tip is a discretionary payment made directly by a customer, whether in cash or by card, over and above the price of the meal. A gratuity is essentially the same thing under a different name. Service charge is different, since it is usually added by the business itself to the bill, either as a fixed percentage or a discretionary suggested amount.
Whether service charge counts as a qualifying tip under the new law generally depends on whether it is discretionary from the customer’s point of view and whether the business has genuinely passed control of it to workers rather than treating it as general revenue. Because this distinction affects both employment law duties and the tax and National Insurance treatment, it is worth reviewing exactly how your till, card machine and menu describe any service charge you add.
Is Service Charge Subject to VAT?
The VAT treatment of tips, gratuities and service charge follows a different logic to the tipping law itself. A genuine tip or gratuity, freely given by the customer over and above the price of the meal, is outside the scope of VAT, whether it is paid in cash, by card, or distributed through a tronc, because it is not consideration for a supply of goods or services.
A service charge is treated differently where it is not genuinely discretionary. If a restaurant or cafe adds a compulsory service charge that the customer has no real choice but to pay, HMRC generally treats this as part of the consideration for the meal, meaning standard rated VAT applies to it in the same way as the rest of the bill. Making service charge genuinely optional, and being able to show that customers can decline it, is therefore relevant to both the tipping law and your VAT position, so this is worth reviewing alongside your wider tax planning.
How Tronc Accounting Can Reduce National Insurance Costs
One of the main financial benefits of a properly structured tronc is the potential National Insurance saving. Where tips are distributed through a genuinely independent tronc, meaning the employer does not control or influence how individual amounts are allocated, those tips are generally exempt from employer and employee Class 1 National Insurance, although Income Tax is still due through PAYE. Where an employer simply pools tips and pays them out through the normal payroll without an independent troncmaster, National Insurance is usually payable in the same way as ordinary wages.
For a busy restaurant or cafe with a meaningful volume of card tips and service charge, this difference can add up to a significant saving over a year, but only if the tronc is structured and run correctly. This is one of the reasons it is worth involving your payroll provider or accountant when setting up or reviewing a tronc, rather than treating it as a purely internal staff matter.
Setting Up a Tronc Scheme: Troncmaster, PAYE Scheme and HMRC Registration
Setting up a tronc properly involves a few practical steps. A troncmaster needs to be appointed, and this person should have genuine independence over how tips are allocated rather than simply following instructions from management. HMRC needs to be notified so that a separate PAYE scheme can be set up for the tronc, since Income Tax still needs to be deducted from tips before they reach staff, even where National Insurance does not apply.
The troncmaster is then responsible for keeping records of how much has been collected, how it has been allocated between staff, and for reporting this through the tronc PAYE scheme each pay period. Many restaurants and cafes choose to have their accountant or payroll provider run this PAYE scheme on the troncmaster’s behalf, which keeps the reporting consistent with the rest of the business’s payroll while preserving the independence that the National Insurance exemption depends on.
Fair Allocation of Tips: What the New Law Requires
The Employment (Allocation of Tips) Act 2023 does not force every worker to receive an identical share, but it does require tips to be allocated fairly between workers at each place of business, taking into account factors that could reasonably apply, such as role, hours worked and seniority. A statutory Code of Practice sets out how fairness should be approached in practice, and restaurants and cafes are expected to have regard to it.
In practice, this means a tronc allocation method that was never written down, or that has not been reviewed for some time, is a compliance risk as well as a staff relations one. Reviewing your allocation method against the statutory Code, documenting it in a written tips policy, and being able to show how the method was decided are all now part of good tronc accounting practice, not just employment law best practice.
Cash Tips vs Card Tips vs Service Charge: Accounting Treatment
Cash tips handed directly to staff and kept by them, without ever passing through the business, generally fall outside the scope of the tipping law and the tronc, since the business never has control of the money. Once cash tips are collected centrally, for example placed in a shared tip jar and pooled, they come within scope and need to be accounted for through the tronc in the same way as other tips.
Card tips and service charge processed through your card machine or EPOS system are different, since the money passes through the business bank account before being paid out to staff. These need to be tracked separately from till takings in your bookkeeping, allocated through the tronc, and then paid to staff net of any Income Tax due, with the corresponding PAYE reported under the tronc scheme rather than simply added to general wages.
Common Tronc and Tips Accounting Mistakes Restaurants and Cafes Make
Treating the Tronc as Employer Controlled
If management effectively decides who gets what, even informally, HMRC can treat the tronc as employer controlled, which removes the National Insurance exemption on the tips involved. A genuinely independent troncmaster, with a documented method for allocation, is essential to protect the saving.
Not Registering a Separate PAYE Scheme for the Tronc
Some restaurants and cafes pay out tips without ever setting up the separate PAYE reference HMRC expects for a tronc, which can lead to Income Tax being reported incorrectly or not at all on tips that should have been taxed.
Mixing Tips With Till Takings in the Bookkeeping
Where card tips and service charge are not separated from ordinary sales in the accounting records, it becomes very difficult to demonstrate how much was collected and how it was allocated, which is exactly the kind of record HMRC and staff can now request.
Having No Written Tips Policy
Since a written policy is now a legal requirement for businesses that collect tips regularly, having nothing in writing, or a policy that has not been reviewed since before the new law came in, leaves a restaurant or cafe exposed.
Record Keeping and Tips Policy Requirements
Good record keeping is central to tronc accounting under the current rules. You should keep a written tips policy explaining how tips are collected, allocated and paid, records of the total amount of tips collected each period, and records of how those amounts were allocated between individual workers. These records need to be retained for a set period, since workers have a right to request certain tipping information relating to themselves.
This is also where good bookkeeping matters, since tips and service charge need to be tracked separately from ordinary sales from the point they are collected, not reconstructed after the event when a query or a request for records arrives. For the government’s own guidance on the rules, see the tips at work guidance on the UK government website.
Why Choose NS Accounting for Tronc and Tips Accounting
We help restaurant and cafe owners across Uxbridge and the wider UK set up and run compliant tronc schemes, structure PAYE correctly around an independent troncmaster, and keep the records needed to satisfy both HMRC and the new tipping law. We work alongside your existing payroll arrangements so that tronc accounting fits naturally into your normal pay run rather than becoming a separate, error prone process.
You can read more about how we support hospitality clients on our accountants for restaurants page, and see what other clients say about working with us on our client testimonials page. To find out more about our team, visit our about us page.
How to Get Started With Tronc Accounting Support
If your restaurant or cafe collects tips, service charge or gratuities and you are not confident your current tronc arrangement is compliant or tax efficient, the best first step is a review of how tips are collected, allocated and reported. Get in touch with our team to arrange a tronc accounting review and make sure both your staff and your business are properly protected.
Final Thoughts: Tips, Service Charge and Tronc Accounting for Restaurants and Cafes
Tips, service charge and tronc accounting sit at the meeting point of employment law, tax and payroll, which is exactly why so many restaurants and cafes get some part of it wrong. Since the Employment (Allocation of Tips) Act 2023 came into force, fair allocation, prompt payment and proper record keeping are legal requirements, not optional extras, while a genuinely independent tronc can still deliver a real National Insurance saving when it is set up correctly. Speak to NS Accounting to make sure your tronc scheme is both compliant and working in your favour.
