Mitigating the impact of the Employment (Allocation of Tips) Act 2023 on your business

May 17, 2024

“With the Employment (Allocation of Tips) Act 2023 expected to be implemented on 1 October, many in the hospitality industry are bracing for its effects,” says Julie Goss, Payroll Manager.

“This new legislation mandates that tips and service charges paid into a central pool via card payments must be distributed to staff fairly and transparently, allowing no deductions except for necessary tax payments.

(Tips paid in cash directly to a server aren’t regulated by the Act).

This creates two key challenges for businesses:

  1. Those who were previously taking a cut from tips or using it to fund staff expenses (like meals during shifts) are losing out on a key cost-offsetting source.
  2. Those businesses without a robust tronc system in place must now find the money to implement one.

“As such, businesses need to prepare for the increased operational costs and find strategies to minimise financial strain while adhering to the changed law,” adds Julie Goss.

What is a tronc?

Within discussions of the Act, you may have heard of the term “tronc” which simply refers to the centralised collection “pot” for the gratuities paid by your customers.

Derived from the French term for a “collection box,” a tronc is used to pool tips and service charges from card payments.

The person who oversees the tronc is called the “troncmaster”.

Carefully choosing who fulfils this role is critical as they must be independent from the business’s management to ensure an impartial distribution of tips.

The Act strongly recommends that a tronc and troncmaster is set up within your business to ensure the fair allocation of tips.

Although it is possible to maintain compliance without these, having automated tronc systems makes your job much easier and aids in compliance.

Preparing your business

To maintain compliance and stay financially secure, you’ll need to put extra effort into adjusting your business operations to align with the legislation.

In the short term, this likely includes:

  • Establishing transparent policies and keeping precise records on tip distribution which must also outline the distribution methodology and be accessible to all staff.
  • The legislation limits employers’ involvement in tip management so ensuring gratuities are paid fairly and/or the troncmaster remains independent is going to be vital for legal compliance and transparency.

Proper tip management is also going to be crucial for payroll and taxation.

Since tips must be distributed without non-tax deductions, businesses will need to adapt their payroll systems to manage these transactions separately.

Tips managed through an independent tronc are not subject to NICs, unless they are directly paid by the employer and the mismanagement of this could attract penalties from HM Revenue and Customs.

Advice for navigating the new regulations

To mitigate the financial impact that the Act is going to have on your business, we advise:

  • Evaluating financial flows: Assess your current expenditures and cash flow to identify potential savings.
  • Revising wage policies: Ensure wages reflect the true contribution of each employee, in compliance with the new regulations.
  • Exploring tax strategies: Look into tax reliefs and exemptions that could reduce costs.
  • Consulting professionals: Engage with financial advisors early to adapt to these changes effectively, ensuring both compliance and financial stability.

Julie points out: “Early action will allow for smoother transitions and could even enhance your business’s financial health while ensuring you comply with the new law.

“As such, we advise you take a proactive approach because it’s a great compliance measure and a strategic business practice that can vastly improve your financial situation.”

For more information or advice, please reach out to our team.

Further reading

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